RBI’s stance to turn more accommodative

Reserve Bank of India (RBI) are expected to keep the key policy rates unchanged next week, according to economists at Barclays. However, the RBI’s monetary policy stance will likely turn softer with the risk of one more repo rate cut in H2 2015 rises. 

In its previous round of policy announcements in early June, the RBI lowered the repo rate by 25bp, as expected, but maintained a cautious policy stance. The three key risks that the central bank highlighted were:

1. below-normal monsoon rains;
2. firming crude oil prices; and
3. volatility in the external environment.

Cumulative rainfall during June-July stands at 96% of normal, better than the 88% projected by the India Meteorological Department (IMD) for the season (June-September) in earlyJune. Brent crude oil price has softened to c.US$54/barrel currently from c.US$65/barrel in early-June. The eventual liftoff by the US Fed remains an impending external uncertainty. 

However, "given India’s generally sound macroeconomic parameters, we feel the impact of Fed liftoff on India will likely be relatively limited," added Barclays.

"Accordingly, we see a case for further easing in the coming months by the RBI. The monsoon outcome will be largely clear by September and the initial impact of a potential Fed hike – if indeed takes place in mid-September – on INR assets would be visible before the RBI’s end-September policy meeting. We look to the RBI’s commentary and guidance next week to firm our views in this regard. However, given the ongoing soft inflation backdrop, the risk of a 25bp repo rate cut by the RBI in H2 15 is rising, in our view."