Time to wait and watch

STEADY GROWTH ENVIRONMENT LENDS SPACE TO WAIT RATHER THAN DELIVER FINAL RATE CUT, IF THERE IS ONE

- ANUBHUTI SAHAY Head-India, Economics Research, Standard Chartered Bank

IT CAN BE expected that India’s Monetary Policy Committee (MPC) will keep the repo rate unchanged at 5.25% at its February 6 meeting. While the upcoming base year revision in the consumer price index (CPI) can potentially provide space to cut rates one more time in FY27, we believe other factors (risk of limited transmission, continued weakening pressure on the INR, a still-strong growth, and a need to build buffers amid an uncertain global environment) dilute the case for further rate cuts. In our view, the Reserve Bank of India’s (RBI) focus will remain (as has been the case in the recent past) on the provision of adequate liquidity to ensure that market rates remain aligned with the repo rate. The Indian rupee liquidity injection (to offset FX outflows) via bond purchases is also likely to contain the rise in bond yields (though yield management is not the main objective). Bond yields face upside pressure amid larger-than-expected borrowing for FY27.

We discuss the rationale for our views below.

The base year revision in CPI is likely to provide space to cut one final time. The ministry of statistics and programme implementation will release the new CPI series with a revised base year of 2024 on February 12. Thus, we think the MPC is likely to await full clarity on the FY27 inflation trajectory in the new series before taking any further rate action at this week’s meeting.