Pre-policy Perspective – Madan Sabnavis, Chief Economist, Bank of Baroda

The MPC will have a unique issue to debate when it meets next week for the monetary policy. The recent downhill movement of the rupee following the Fed’s announcement has made the rupee one of the more unsatisfactory currencies based on the response to the dollar strengthening in the global market. This piece will also be actively discussed in the deliberations, as when deciding on interest rates, the currency part of the story cannot be left out.

Inflation remains high at around 7% and is unlikely to come down any time soon. This means that a rate hike is given. The quantum is what the market would be interested in. While a hike of 25-35 bps would have signaled that the RBI is confident that the worst of inflation is over, the recent developments in the forex market could prompt a higher quantum of 50 bps to stay on track with other markets so as to retain investor interest.

The RBI’s take on both inflation and GDP growth will be important. We do not believe there will be any change in the headline numbers. GDP growth in Q1 was lower than RBI expectations, but given certain anomalies in the data there would be some revisions that will help to retain their targeted level of 7.2%. Presently with no new shock expected on the prices front the inflation forecast will remain unchanged. Stable global commodity prices especially oil provides a lot of comfort for the central bank.

This time we may expect some announcements on liquidity since after a long time it has moved into a deficit. This is exerting pressure on short term yields and sort of inverting the curve. A calendar on OMO is what could be expected along with variable repo auctions. As we expect stance to change to neutral, reintroduction of GSAPs may be skipped to avoid sending contrary signals.