Reserve Bank of India (RBI) will announce its first bi-monthly monetary policy for the new fiscal today. Sonal Varma, MD & Chief India Economist at Nomura Financial Advisory & Securities (India) shared her views and expectations from RBI policy.
"In terms of overall expectation for the repo rate, we are not expecting any change", she said.
Main focus of the monetary policy is on liquidity and further action depends on whether RBI thinks liquidity is permanent or transitory, she added.
"If RBI believes that there is a permanency to liquidity then a permanent tool like cash reserve ratio (CRR) hike will likely be used. I would say the probability is a bit more than 10 percent but we are not going with a base line of CRR hike at this policy, although we do have a CRR hike penciled-in in the second half of 2017", she said.
Explaining her stance of why she does not expect CRR to be hiked in this policy, she said, "There is still a bit of uncertainty on how much of this will stay given that the withdrawal restrictions have just been lifted, so probably RBI waits to see how much liquidity gets automatically drained because of more withdrawals happening. So we think they will probably wait for a bit more time but we do expect a hike in CRR sometime later".
According to her, commodity prices are at the same levels as two months ago.
Varma also expects RBI to flag monsoon as a concern for the inflation outlook going forward.
"Introduction of a standing deposit facility (SDF) is something that we would expect them to announce, though there are a lot of uncertainties in terms of rate at which it will be introduced and its impact", she further said. SDF's implementation may depend on a legal amendment but she expects it to be announced today.
On inflation and food inflation, she said, "Our broad expectation is that food inflation as well as headline inflation are both headed higher".
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