The Reserve Bank of India (RBI) is expected to maintain status quo throughout this year, keeping the repurchase rate steady at 6.25 percent in 2017. However, beyond this year, the next move is likely to be a rate hike rather than a cut as the RBI policy committee remains keen to maintain price stability.
Apart from domestic considerations, the RBI will also keep an eye on global developments, especially the direction of US Fed policy. Further compression in the US and Indian long term rates, coupled with US dollar strength could induce volatility in the financial markets. Stability, therefore, will be a priority for the RBI, prompting a status quo stance on rates, DBS Bank reported in its latest research publication.
The central bank surprised on two counts in February. Benchmark rates were left unchanged in contrast to expectations for a cut. The policy stance was also shifted to a neutral bias from accommodative earlier, pulling the brakes on the easing cycle that started in early 2015.
“Under the flexible inflation targeting regime within +/-2 percent of the mid-point of 4.0 percent, the RBI will not be required to hike immediately in case of an overshoot. Nonetheless, the rate bias is tilted more towards hikes than cuts going forward,” the report said.