Reserve Bank of India likely to stand pat on Tuesday, may lower rate by 25 bps in Q4

The Reserve Bank of India is expected to stand pat during its policy review meeting on Tuesday. The central bank is unlikely to make any changes to its current rate as accelerated food inflation has blocked all the monetary space that the central bank needs to successfully execute a rate cut, said Societe Generale in a research note. Tomorrow’s monetary policy meeting will be the last meeting under Raghuram Rajan’s governorship.

India’s consumer price index inflation continues to be at 5.8 percent year-on-year for two straight months in May and June. The progress of monsoon in India continues to be quite an important factor for the Reserve Bank of India.  The monsoon does not affect food prices in India as much as other factors. However, after two straight years of drought, a good monsoon is being hoped for by everyone.

Headline inflation in India is expected to be more than the Reserve Bank of India’s January 2017 target of 5 percent year-on-year in the future.

“Despite this, we continue to expect a 25bp rate cut during 4Q 2016,” added Societe Generale.

This is because the new governor that will replace Rajan in September is expected to be less independent and probably more amenable to accepting a higher threshold as the government currently desires, noted Societe Generale.