It did not come as a surprise that the Reserve Bank of India (RBI) maintained status quo on rates in its policy meeting today. The repo rate was kept on hold at 7.50%. This does not indicate an end to monetary policy easing, however; the RBI emphasised in its policy statement that its stance remains accommodative.Also, while the RBI has made the amount and timing of further rate cuts contingent upon four pre-conditions the governor said that “some progress” on these could trigger rate action. The RBI will watch for developments on (1) The transmission of a 50bps reduction YTD in the repo rate, (2) CPI inflation prints, especially after the recent unseasonal rainfall, (3) policy efforts to unclog supply bottlenecks and reduce the pipeline of stalled projects, and (4) the impact of the US Fed’s expected interest rate normalisation on financial markets.Standard Chartered says they expect another 50bps reduction in the repo rate to 7.0% in FY16, equally split between the June and August policy meetings.The RBI will, by then, have fresh information on most of its pre-conditions, especially on transmission channels and the impact of weather on the CPI inflation trajectory. Remaining fairly confident that the first 25bps of policy rate reduction will occur by June, the subsequent 25bps reduction may be delayed if the RBI becomes concerned about the impact of the first Fed rate hike. “We see a risk that the last 25bps reduction may not occur if the RBI decides to keep real policy rates at the mid-point of its desired 150-200bps range, instead of at the lower end as we currently assume. We expect CPI inflation to average 5.4% y/y in FY16”, Said Standard Chartered in a report on Wednesday
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