India: RBI leaves policy unchanged
Absent a cyclical weakening in the USD we expect the 65.00 level will prove to be a strong support for USD/INR to break through in the rest of the year
Consistent with a solid consensus forecast, the Reserve Bank of India kept monetary policy on hold today. The key policy rates, the repurchase rate and reverse repo rate, stood at 6.00% and 5.75% respectively after a 25bp cut at the previous meeting on August 2.
A reversal of the downward trend in CPI inflation in recent months and persistent downtrend in GDP growth, taking it to a three-year low of 5.7% in 1QFY18 (April-June, 2017), have altered the dynamics of RBI policy.
Going forward, we expect inflation to continue to grind higher and limit the scope for the RBI easing to support growth. As such, fiscal policy will take centre stage in boosting the economy. Earlier today the finance ministry announced a reduction in excise duty on gasoline and diesel in a bid to ease inflation pressure. We do not expect the impact to be notable. The biggest dilemma for people on the street is that even as the global oil price is hovering below half its level before the mid-2014 crash, domestic fuel prices remain close to their level three years ago.
Expansionary fiscal policy and the resultant negative implications for the rupee will also be inflationary. This and shift in the developed market monetary policies towards tightening suggests to us that the next move in RBI policy rates will most likely be higher, though we do not expect it to be anytime soon. The consensus is on-hold RBI through 2018.
The concerns about fiscal slippage will continue to exert weakening pressure on the INR and Indian government bonds. Absent a cyclical decline in the USD; we expect the 65.00 level will prove to be a strong support for USD/INR to break through in the rest of the year.
Stalled rally in the Indian government bonds and the INR
Download
Download article"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).