Halister News

(Bloomberg) -- RBI Governor Raghuram Rajan will probably leave rates steady at his last scheduled policy review Tuesday, with inflation likely to stay elevated a few more months, economists say.

• His statement will be monitored for any further guidance on RBI’s liquidity stance; banking cash has broadly turned neutral ahead of ~$20b of outflows for repayment to non- resident Indians starting Sept.
• 12 of 13 economists in a Bloomberg poll expect repo rate to be held at 6.50%; one expects 25-bp cut
• Rate decision due 11am Mumbai time

• KEY MACRO
  • CPI at 22-mo. high of 5.77% in June; RBI’s March 2017 target is 5%
  • Wholesale prices rose 1.62% in June, highest since Oct. 2014
  • Govt sticks to 4% +/-2% CPI target through 2021
  • Industrial production rose 1.2% in May vs -1.3% in April; volatile data make index less reliable
  • Banking system liquidity boosted by RBI liquidity infusions via OMO and FX intervention
  • RBI’s real rate of interest is 93 bps vs 1.5%-2.0% rate advocated by Rajan
  • Govt has pushed through GST bill in Parliament
  • Govt yet to select members of RBI’s rate-setting panel
  • Monsoon rainfall 1% above normal as of Aug. 4
  • April-June fiscal deficit at 3.26t rupees, 61.1% of full FY target

• WHY RBI IS LIKELY TO HOLD
  • CPI should remain elevated in next few prints due to higher than seasonal jump in food prices, ANZ said in Aug. 5 note; doesn’t see retail inflation moving below 5% on a sustained basis; RBI should keep rates on hold for rest of 2016
• Inflation outlook remains RBI’s most significant concern, Capital Economics writes in Aug. 2 note; prices are close to peaking, but substantial drop seems unlikely
  • Finance Ministry will relax fiscal-deficit targets in coming months, reinforced by govt’s decision to formally approve pay increases of $31b
• RBI will need to factor in higher than expected May and June CPI plus partial implementation of pay panel recommendation, UBS says in a note dated Aug. 5

• WHY RBI COULD SURPRISE
  • Passage of GST will support call for 25-bp rate cut now, BofAML economists wrote in Aug. 4 note; good monsoon will pull down agflation and inflation; high lending rates hurting recovery; will allow faster transmission of lending rates ahead of busy lending season starting Oct.