Comments on RBI policy by Nirmal Jain, Chairman, India Infoline

"As a prudent measure, RBI left the policy rate unchanged in a scenario where sharp rupee depreciation has clouded inflation outlook and volatility in portfolio flows has increased CAD financing risks. India has seen some outflow of FII money from the debt market and a rate cut at this juncture could have only exacerbated this situation. The status quo in the policy should support bond yields in the range of 7.2-7.4% in the near term.

FOMC meeting over June 18-19 would be a key event from the rupee perspective wherein the Fed would release its updated projections of growth, inflation and unemployment along with its much-awaited stance on the QE program. In our view, the Fed may announce a very gradual tapering of its bond buying program thereby infusing some stability in emerging markets.

On the domestic front, though core inflation has continued to moderate aided by weakening consumption and diminishing purchasing power of corporate, food inflation has shown signs of rising again both at the wholesale and consumer levels. The progress and distribution of monsoon and the extent of MSP increases would determine food inflation outlook. Therefore, RBI's argument for seeing a more durable decline in inflation before addressing growth risks in fully justifiable. Also, the cumulative 75bps repo reduction over the previous three meetings has not meaningfully transmitted to borrowers due to high retail inflation. We think policy guidance is neutral suggesting willingness to cut rates but remaining alert to emerging risks to inflation and CAD. We expect the central bank to cut the repo rate further by 75-100bps in the remainder of the fiscal".

Source : Equity Bulls

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