Shift in RBI’s liquidity stance, easing inflationary expectations pave way for rate cut on Tuesday

The Reserve Bank of India is expected to have drawn comfort from slowing inflationary expectations that made the way for it to lower the interest rate, according to a DBS Bank report. However, the biggest draw continues to be the change in RBI’s liquidity stance. According to the March 2016 survey that was released simultaneously with the policy statement, expectations for three-month and one-year eased significantly. RBI concentrates more on the incremental change in these projections and less on the absolute level, noted DBS Bank.

The March 16 survey contented both the objectives, with the sharpest q/q easing witnessed since Q4 2014. Heavy-weight food prices stabilization is expected to have driven this, according to DBS Bank. The heavy-weight food prices were more than countered by the effect of global oil prices bottoming out. However, additional correction might be shallow, added DBS Bank.

Meanwhile, the liquidity supportive measures of the RBI continued to boom. Particularly, in recent years, reserve money growth has declined due to the preference to keep tight liquidity by extending anti-inflationary stance, noted DBS Bank. Attention now will be paid to the downward adjustment in banks’ retail deposit/lending rates, according to DBS.

With a calculated shift to neutrality from current deficit mode suggests that the same quantum of liquidity will be steeped over time via a mixture of government bond buying or absorbing foreign inflows. Short-term and long-term rates are likely to ease in the coming months as the authorities continue to be eager to see a total of 150bps worth cuts seep via the system, said DBS Bank.