Status quo on rate likely but RBI tone may be slightly hawkish on Feb 7: BofA-ML

After Budget 2018, all eyes are on RBI monetary policy scheduled to be released on February 7. Economists largely expect status quo on policy rates but key to watch would be the commentary.

According to a majority of economists, RBI may start hinting about rate hike in forthcoming policies in line with a tightening global interest rate cycle.

“We continue to expect the RBI to persist with its slightly hawkish pause in its Wednesday policy, from February, to err on the side of caution,” Bank of America Merrill Lynch said in its research note.

“That said, falling onion prices, after tomatoes, support our call that inflation risks are overdone,” it added. In fact, the government has reportedly removed the US$700/t minimum export price for onions.

Inflation is seen cooling to 5 percent in January from 5.2 percent in December with the vegetable price spike expectedly reversing, according to the research house.

December inflation actually printed a benign 4 percent, well within the RBI’s 4-6 percent inflation mandate, adjusted for the onion and tomato price spike.

CPI inflation for January will be announced on February 12, 2018.

Fundamentals – weak growth, tight M3, a possible La Nina monsoon year this year – do not support a higher inflation outlook, looking through base effects, according to BoAML.

It expects the RBI MPC to look through base effects that will drive up growth, credit and inflation in mid-2018.

Although growth will pick up to 7.5 percent in the April-September quarters, on base effects of demonetisation/GST, it should slip to 7 percent in second half of FY19, it said.

While inflation will jump to 5.4 percent in April-June, which is spooking some in markets, this emanates from the base effects of low 2.2 percent April-June 2017 inflation, it added.

Finally, it thinks that the macro risks in the G-sec market are overdone with the RBI stepping up durable liquidity/reserve money injection to USD 27 billion (USD 30 billion BoAML estimates) from barely USD 4 billion in end-November. Still, markets will look to the RBI policy on Wednesday for confidence building measures, the research house said.

On balance, BoAML expects the RBI to cut 25bp in August if the La Nina dampens agflation.

Its oil analysts also expect oil prices to come off by 10 percent to USD 62 a barrel by December 2018. Not surprisingly, core inflation (ex food, fuel and HRA) is hovering about a reasonable 4.2 percent. That said, it does worry poor rabi sowing in the interim.

Although Budget 2018 has raised minimum support prices (MSP), the inflationary impact will likely be limited as the revised MSPS are still below market prices in many cases, it feels.moneycontrol