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The USD/INR currency pair is expected to trade sideways within the range of 64.50-65.50 and the Reserve Bank of India (RBI) shall be contented to see this, according to a recent report from Commerzbank.
The most important monthly release for India these days has been CPI data since it will determine whether RBI should consider a rate hike or stay on hold. The February report showed inflation surprised on the downside at 4.4 percent y/y (consensus: 4.7 percent) from above 5 percent in the previous two months. This was mainly driven by lower food and beverage prices which make up 54 percent of the CPI basket. This is good news for RBI and should reinforce their wait-and-see approach.
On the one hand, RBI’s bias is tilted to the hawkish side given the brisk uptick in inflation over the past six months. On the other hand, they are reluctant to hike rates too early in case they kill off the tepid recovery i.e. an economy that’s only beginning to get back on its feet after the dual shocks last year by way of demonetization and the GST introduction.
As such, the rates market is not convinced yet that inflation is under control i.e. inflation to fall back to the mid-point of RBI’s 2-6 percent inflation target range. One reason for this could be elevated core CPI, excluding food and energy, which is still around 5 percent y/y. This could reflect a better than expected growth backdrop and exerting upside cost pressures.
"Overall, the report should not move the needle that much for RBI and we expect rates to be left unchanged at 6 percent at the next policy meeting on 4-5 April," the report added.
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