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RBI likely to soften monetary policy stance amid easing inflation, says Scotiabank

The Reserve Bank of India (RBI) is expected to soften its monetary stance to "neutral" from current "calibrated tightening" at the February 7 rate meeting, according to the latest research report from Scotiabank.

Further, rising real interest rate will hamper investment activity and prompt the market to increasingly price in a RBI rate cut at the April rate meeting. The central bank’s softer tone would be supportive of local government bonds and prop up the INR afterwards.

India’s CPI inflation eased to 2.19 percent y/y in December from 2.33 percent a month ago. Although the nation’s retail inflation may rebound somewhat in the January-March period, it is expected to slide again from April onwards on the back of the base effect.

Earlier, data released last Friday showed that the nation’s industrial production growth dropping to a 17-month low of 0.5 percent y/y in November.

"Meanwhile, we keep a close eye on India’s fiscal position ahead of the 2019 general election due by May. The BJP-lead NDA government will likely give cash handouts to farmers along with tax exemptions to shore up voter support ahead of polls, after losing control of key states in assembly elections held last month," the report commented.

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