RBI likely to hold rates, may sound more confident of reaching inflation target: Report

Mumbai: The Reserve Bank is expected to hold its key rates at the forthcoming policy review, but may sound more confident about reaching its 4 per cent inflation objective, a foreign brokerage said on Wednesday.

The rate-setting panel may prefer to stick to the ‘withdrawal of accommodation’ stance of the monetary policy, HSBC said in the report on the eve of the RBI MPC’s decision.

“While it’s a close call, we also think the policy stance will remain unchanged, even as the RBI sounds more confident than before about getting to its 4 per cent inflation target,” it said, listing out the aspects it will watch out for in the document or the resolution.

These include any softness in tone around increased confidence of getting to 4 per cent inflation durably, or a change in growth or inflation forecasts, and, further commentary around the use of OMO (open market operations) sales to take out excess liquidity.

In the background of another member dissenting at the last policy review, the brokerage said the number of MPC members calling for a rate cut or change in stance will also be watched keenly.

Apart from this, it said any more colour on the plans to change regulatory requirements on the liquidity coverage ratio, which is reported to have a bearing on banks’ profitability, will also be watched, it said.

On the stance questions, there are several points in support of softening from the current “hawkish” posturing, the brokerage said, adding that there are an equal number of aspects against such a move as well.

Factors such as global turmoil, improving rains, soft core inflation, weaker credit growth and fiscal consolidation support a softening of the stance, while on the other side, there are competing ones like long wait for a durable fall in food inflation, loose financial conditions, OMO sales and growth being strong on the other side, it said.