India Monetary Policy Review – April 2014

At its first bi-monthly Monetary policy statement for 2014-15, the RBI maintained the policy Repo rate at 8%, as expected. India’s headline inflation indicators have improved with easing vegetable prices, although the Core CPI remained sticky at 8%, reflecting high prices for services.

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  • At its first bi-monthly Monetary policy statement for 2014-15, the RBI maintained the policy Repo rate at 8%, as expected.
  • India’s headline inflation indicators have improved with easing vegetable prices, although the Core CPI remained sticky at 8%, reflecting high prices for services
  • Recent activity indicators are mildly positive, but do not signify any strong recovery. India’s potential growth is likely to have fallen to around 6%, limiting the scope for rate cuts to support growth.
  • India’s external indicators remain strong with the Current Account Deficit projected to be around 2% of GDP for the 2013-14 Financial Year. Moreover, FX Reserves are over USD 300bn, the highest since December 2011.
  • The Indian Rupee is trading around INR 60/USD, stronger than levels reached over the past few months. A comment by Governor Rajan that indicated a level of 55 INR/USD would be considered ‘high’, did exert some modest downward pressure on the Rupee.
  • Improved external indicators and optimism about a more business friendly government has led to a surge in Foreign Institutional Investor Interest in Indian Equities.
  • The economic policies of the newly formed Government in May will be critical to the performance of India’s economy and financial markets.
  • Election related uncertainty is manifest in India’s Volatility Index (Nifty VIX), which has continued to trend up.
  • NAB Economics is maintaining its forecast for the Repo rate at 8% through the 2014-15 Financial Year, albeit with slight upside risks. The latter stems from potentially higher inflation projections from a possibly weaker monsoon, and increased pricing power among Indian Corporates due to a smaller output gap.

For further analysis download the full report.