Comments on Monetary policy - DBS Bank

Ms. Radhika Rao, India Economist, DBS Bank on the Monetary policy

The RBI eased policy rates by 25bp, along expectations but the decision was not unanimous Accompanying rhetoric is largely neutral, without giving away particular bias for the rate trajectory. The latter will allow the RBI to be non-committal on the future course of action, retaining the flexibility to react to the evolving inflation trajectory. We reckon that the central bank remains fixated on the inflation outlook, rightly so given its central mandate, rather than being burdened by other considerations, which includes supporting growth and financial stability. Looking ahead, event risks are aplenty , but the disinflationary pressures in core inflation and ongoing structural corrective steps in food management suggest inflation is likely to stabilize around 4.0% from two to three quarters from now. Today's policy statement is not a game-changer for the markets, with a neutral central bank to keep interest rate differentials in favour of the economy and thereby fueling foreign investor interests. One needs to differentiate between liquidity management and the rate direction, which might over the course of the coming months move in opposite directions. Whilst rates might be lowered in response to benign inflation, liquidity might continue to be drained to ensure the operating rate target is close to the policy rate.

Source : Equity Bulls

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