RBI likely to hit pause button: Standard Chartered

All eyes are on the Reserve Bank of India's bi-monthly policy, which is scheduled for tomorrow (June 7). Most of the experts believe that the RBI will not go ahead with any repo rate cut. Standard Chartered, too, maintains that the interest rate will stay put. Here is an excerpt from Standard Chartered's report: We expect the Reserve Bank of India (RBI) to keep the repo rate on hold at its monetary policy meeting on June 7. Global uncertainty has increased ahead of the UK’s 23 June European Union (EU) membership (Brexit) referendum and possible Fed rate hikes. The central bank is also likely to be cautious due to the recent rise in the headline CPI reading. Unfavourable weather pushed April CPI inflation to 5.4 percent y/y, 35bps (basis point) higher than expected. We expect the next few prints to remain elevated (we expect 5.9 percent in May) on high food inflation. While monsoon forecasts have been encouraging and inflation will likely slow in H2-FY17, we believe policy makers will watch for initial progress on rains and for more clarity on external-sector developments before making policy decisions. We expect the RBI to maintain its accommodative monetary policy stance, but are wary about the possibility of further easing. We think further rate cuts are unlikely unless food prices fall faster than we expect or oil prices do not rise further. We expect inflation of 5.3 percent in FY17 (ending March 2017), versus 4.9 percent in FY16. We believe the markets are more concerned about Indian rupee (INR) liquidity in the banking system than policy rate cuts at present. The liquidity deficit has narrowed in line with the RBI’s revised stance since April on an accelerated pace of bond buybacks and government spending. We expect the deficit to narrow further until September. However, a fresh INR liquidity shortage may emerge from September-November on foreign-currency non-resident (FCNR) deposits redemptions of USD 26 billion (Rs 1.7 trillion). Any RBI guidance on how it plans to manage this will likely ease market concern. We maintain a positive view on Indian Government Bonds (IGBs) on attractive carry (for local and foreign investors) and expectations of easing liquidity conditions. The RBI has injected Rs 700 billion of liquidity via open-market purchases of IGBs since April 2016. This has supported IGBs and insulated the market from volatility.