The Reserve Bank of India is expected to keep key policy rates unchanged in the remaining 2018-19 fiscal, said Saugata Bhattacharya, Senior Vice President, Business and Economic Research, Axis Bank.
"My guess is at least is this year we won't see a further rate hike," he said.
He also said that major components of growth may moderate going forward cyclical component has shown upward movement from 2016-17, current investment cycle is driven by government spending and inflation trajectory seen down for the next 2-3 months.
He further said that US Federal Reserve has been signaling rate hike but RBI will not hike rates to match the Fed move. "No clear correlation between Fed money policy and RBI money policy," he added.
Subdued prices of vegetables and fruits in summer, when prices normally tend to escalate, gave comfort to Reserve Bank of India (RBI) governor Urjit Patel to hold on to rates, but the higher oil prices forced him to change the stance from neutral to calibrated tightening.
RBI governor stated that the change in the central bank’s stance is due to the rising international oil prices that pose a challenge to inflation. He said in the current rate cycle "rate cuts are off the table". RBI had maintained a status quo in its October policy after two consecutive rounds of rate hikes of 0.25 percent each.
Bhattacharya said the RBI policy of focusing on inflation and letting the currency do the heavy lifting was a hugely mature step.
Liquidity is likely to tighten further in H2 FY19, requiring significant infusion to prevent the cost of funds spiking up.
"The problem with liquidity management is its fungibility. Infusion of funds at longer maturities will flow back into short-maturity instruments, increasing the potential of forex market volatility."
"If volatility continues, RBI will have to squeeze near-term cost of funds, while more durable liquidity infusion attempts to flatten the yield curve, which has steepened excessively over the past year," he added.
He also said that portfolio flows to India will slow down as liquidity may tighten in the months ahead
Talking about rupee depreciation, Bhattacharya said that the rupee has probably passed the worst unless the surprise elephants like election do any damage.
He said non-banking finance companies must be prepared and maintain adequate liquidity cushion to offset the potential risk in CPs, which emanates from high dependence on rollovers and refinancing on maturity.
Bhattacharya said around Rs 40,000 crore NBFC funds are about to mature in 2-3 months.
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