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After the Reserve Bank of India (RBI) shifted to a neutral stance from accommodative in February, the market began to contemplate the idea that the next RBI move could be a hike. Since February however, inflation has moderated further to just 3 percent y/y in April – well below RBI’s forecast of 4.75 percent for the current FY2017-18.
The next RBI meeting is scheduled for June 7. It is widely expected that central bank will leave policy unchanged at 6.25 percent. The key things to watch will be its views on the strength of INR and new measures to drain excessive liquidity. If such measures are introduced, the RBI may be more adventurous in FX intervention to mitigate INR appreciation pressures.
"We believe RBI has been reticent to intervene aggressively in the FX market because any unsterilized intervention (i.e. RBI purchases of USD without issuing bonds to soak up the liquidity injection) will only exacerbate the current excess liquidity situation due to last year’s demonetization," Commerzbank commented in its latest research report.
