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Economists at TD Securities think the recent drop in CPI opens the door to a cut when the Reserve Bank of India (RBI) announces its Interest Rate Decision on February 5. Regarding the rupee, the USD/INR pair may see a slight bounce on a cut, but is likely to pivot around 73.00.

Key quotes

“We expect the RBI to cut its repo rate by 25bp to 3.75% (consensus 4.0%) and to maintain an accommodative policy stance. We think the recent decline in inflation and better inflation outlook opens the door to another cut. There will also be focus on the RBI’s intentions for its liquidity operations after the recent sharp drain on liquidity implemented by the central bank and we expect the RBI to try to provide some comfort to the bond market after the budget related sell-off.”

“We expect CPI to remain below the top end of the band in the next few months. The sharp drop in food prices, especially vegetable prices, was particularly encouraging recently. While there may be some upside risks from the rise in supply pressures and higher oil prices, we don’t expect this to stand in the way of further easing at this meeting. It may however, limit the scope for action at subsequent meetings.”

“We expect a rate cut to lead to a marginal move higher in USD/INR, but this is likely to be limited and USD/INR is likely to continue to consolidate around 73.0 in the near-term.”