Top five global voices on the Reserve Bank of India policy review

NEW DELHI: Analysts at top brokerage firm expect the Reserve Bank of India ( RBI) to leave policy rates unchanged in its 1QFY 2014 monetary policy review which is due later today.

The priority of the central bank has switched from reviving an economy growing at its slowest in a decade to supporting a currency that recently plunged to a record low.

The INR has depreciated by nearly 10 per cent since May 2013. Consequently, the RBI’s tone remains cautionary against the risks of elevated twin deficits, reversal of capital flows and imported inflation gaining ground and mitigating the beneficial impact of softening global commodity prices.

“Since the RBI has already taken such stringent measures to constrict liquidity in the system, we do not expect the RBI to go a step further and hike the CRR at least for now,” Angel Broking said in a note.

Presently the policy rate – repo stands at 7.25 per cent, reverse repo at 6.25 per cent while the penal emergency lending rate – MSF/ bank rate stands at 10.25 per cent and CRR is at 4 per cent of bank’s NDTL.

The RBI released a report on the economy on Monday that said its priority was currency stability, giving little comfort to investors hoping for a return to rate cuts anytime soon.

Investors will be looking for clues on Tuesday for how long the RBI will maintain its tight grip on cash conditions.

We have collated views from various analysts from brokerages firm on their expectations from the central bank:

Chetan Ahya, Morgan Stanley:

“RBI to keep policy rates on hold in the monetary review on July 30. However, we do see the risk of explicit tightening of repo rates.”

Sajjid Chinoy, India Economist, JP Morgan

“We continue to believe that both cash reserve ratio or policy rate hike looks unlikely in monetary review- because it risks sending out a permanent signal of rate hardening.

The plethora of other instruments being used over past few days is precisely to avoid using these more conventional monetary policy instruments.”

Rajeev Malik, Senior Economist, CLSA

“More measures, including an increase in cash reserve ratio at the policy July 30 meeting, cannot be ruled out. Tactically, the RBI is more likely to prefer sucking out liquidity via bond issuance to ensure that interbank rates remain well above repo rate.

This channel offers more flexibility in an uncertain environment than raising CRR. It will also be politically more palatable as its impact is more limited than increasing CRR.”

BofA-ML:

BofA-ML expects the central bank to maintain ‘status-quo’ on policy rates in its review due on Tuesday. If rupee stabilizes, the brokerage firm expects RBI to cut rates by 50 bps in 2HFY14.

BofA-ML expects the RBI to signal its resolve to hold Rupee at 60/USD for now. We see the rupee at 62/USD, unless issuance of NRI/sovereign bond.

Deutsche Bank:

We see RBI to keep repo and CRR rate unchanged in its policy review due today. We will watch out for signals on how long the RBI measures will last.

The RBI’s comments on economy, Rupee and markets will be watched.