India central bank to hold rates, markets on guard for any shift in stance

By Swati Bhat

MUMBAI (Reuters) – The Reserve Bank of India (RBI) is widely seen holding key rates steady on Thursday but commentary around the future trajectory of interest rates and banking system liquidity will be closely monitored by market participants.

The monetary policy committee (MPC), which has three members from the RBI and three external members, is expected to leave the repo rate at 6.50% for a second straight meeting. All 64 economists polled by Reuters expect no change.

The repo rate has been raised by a total 250 basis points since May last year to quell high inflation which has finally started showing signs of easing.

Slowing inflation and a robust recovery in economic growth are seeing aiding the central bank’s decision to stay pat on rates but concerns around global growth slowdown and its resultant impact on the domestic economy will be a key concern.

Radhika Rao, senior economist at DBS in Singapore said the decision on holding rates is likely to be unanimous, but the question of whether to maintain the current policy stance, which the RBI terms “withdrawal of accommodation”, could be more contentious. The doves on the committee would prefer to close the door on further tightening as inflation has been easing, she said.

The monsoon season rains are just starting in India, and their impact on crops will be crucial to trends in food prices.

“We expect the stance to be maintained this month as the MPC prefers to stay on wait-and-watch mode to gauge the fallout of weather conditions on the price trend before considering a pivot to easing,” Rao said.

The commentary around domestic liquidity and the central bank’s liquidity management operations in recent weeks will also be a focus for bond market participants with inter-bank rates having shot up intermittently despite overall surplus cash in the banking system.

Rao said they do not anticipate any significant change from the present course of action, which is to use temporary repo operations to provide support rather than longer lasting measures.

Indian markets are unlikely to see much reaction if rates and stance is maintained, but a change in stance could fuel a bond and stock market rally while the rupee also could notch some gains.

“It is unlikely that the RBI will precede the Fed in reversing its course of rate hikes,” said Madhavi Arora, lead economist at Emkay Global, while adding that it could soften its tone.

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