RBI likely to leave policy rate unchanged at 6.00 pct with a neutral stance, says Scotiabank

The Reserve Bank of India is expected to leave its policy rate and CRR unchanged at 6.00 percent and 4.00 percent respectively with a neutral stance on Wednesday afternoon, aimed at striking a balance between bolstering the nation’s economic growth and securing the retail inflation target of 4 percent ± 2 percent on a durable basis, Scotiabank reported.

India’s CPI inflation quickened to a 17-month high of 5.21 percent in December on the back of rising vegetable prices and cost of housing and is expected to stay elevated in H1 2018. January print is due next Monday.

India’s re-introduction of long-term capital gains (LTCG) tax and widened fiscal deficit target could discourage equity and bond inflows for now. Finance minister Arun Jaitley, in his Union Budget 2018 speech, re-introduced LTCG tax on stocks. Investors will have to pay 10 percent tax on profit exceeding INR 100,000 made from the sale of shares or equity mutual fund schemes held for over one year.

LTCG tax on stocks was scrapped in 2004-05 by then finance minister P Chidambaram. In addition, finance minister Arun Jaitley in his last full budget projected a higher fiscal deficit of 3.5 percent of the GDP for FY2017-18 compared to the target of 3.2 percent, while revising fiscal deficit target for FY2018-19 to 3.3 percent of GDP against the earlier target of 3.0 percent.

Meanwhile, Reuters reported Friday that the RBI is not in talks with the government currently to conduct open market purchases of government bonds, citing an unidentified person familiar with the central bank’s thinking.

"Meanwhile, we keep a close eye on global bond market sell-off gaining momentum, reckoning surging 10Y UST yields will likely send the VIX Index even higher and dent global risk sentiment further at the current stage," the report said.

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