India: RBI leaves all as is, but suggests further easing may occur next year – TDS

FXStreet (Delhi) – Research Team at TDS, notes that the India’s RBI kept all key rates unchanged yesterday, which means, in particular, that the repo rate remains at 6.75%, while the Cash Reserve Ratio (CRR) stays at 4.00%.

Key Quotes

“The statement reiterated that “global growth continues to be weak” while India’s economic activity suggests that the economy “is in the early stages of a recovery, though with some areas of continued weakness.” The assessment of the domestic and external economic environments suggest that there is more room for policy accommodation from the RBI going forward.

On the inflation path, the RBI seemed comfortable with the recent developments although CPI has been rising of late “as anticipated, and is expected to rise further until December before plateauing.” Faster than expected acceleration in inflation would clearly be concerning from the RBI standpoint, but CPI “is expected to broadly follow the path set out in the September review with risks slightly to the downside.”

As we mentioned yesterday, “The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank’s future deliberations.” The RBI, however, noted that “its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path.”

In conclusion, “The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017.”

All in all, we continue to see space for at least another 25bp cut in Q1 2016, provided that 1) the Fed lift-off does not cause excessive and, especially, prolonged market volatility, 2) inflation does not exceed the RBI’s projected trajectory, and 3) the government remains committed to fiscal consolidation that implies the achievement of a central government deficit of 3.5% in FY 2016/17, after closing FY 2015/16 with a deficit of approximately 3.9% of GDP.”

Research Team at TDS, notes that the India’s RBI kept all key rates unchanged yesterday, which means, in particular, that the repo rate remains at 6.75%, while the Cash Reserve Ratio (CRR) stays at 4.00%.

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