Reserve Bank of India likely to stand pat in February, panel likely to shift to ‘neutral’ stance

The Indian central bank is set to meet tomorrow for its interest rate decision. According to a DBS Bank research report, the Reserve Bank of India’s monetary policy panel is expected to weigh the slippage in FY 2019 and FY20 deficit targets at the Interim Budget tabled last week vs the easing inflation trajectory.

Given that the inflation might remain benign at 2 percent to 3 percent in the remainder of FY2019, the panel is expected to opt for a shift in the policy stance from ‘calibrated tightening’ to ‘neutral’. However, the pro-consumption bias in the FY20 budget might be a lagged risk to the core inflation outlook and thereby restricting the scope of a rate easing cycle.

“We will watch the central bank’s commentary closely gauge their assessment of domestic and external risks, which will reveal whether they see the need to shift to a dovish bias or stay cautious given the likelihood that headline inflation will move back towards 4% by end-year”, added DBS Bank.