Indian politicians are
currently busy making promises, irrespective of their feasibility or likely
impact on fiscal policy or inflation in general. As Monetary policy tends to
act as balancing force amid loosening fiscal policy outlook. Amid this
back-drop MPC need to decide – Should it wait for Election Results?
India’s headline inflation
remained benign with Jan-CPI at 1.97% and Feb-CPI at 2.57%, well below the RBI
target of 4%. It is note-worthy this softness in headline inflation is largely
due to lower food inflations as core inflation remained sticky at 5.2% levels.
|
|
2-Apr
|
7-Feb
|
Change Feb Policy
|
|
Crude Oil
|
69.05
|
61.67
|
11.97%
|
|
Indian Rupee
|
69.11
|
71.45
|
-3.28%
|
|
Nifty
|
11,070.00
|
10,700.00
|
3.46%
|
|
India 10 year
|
7.40%
|
7.50%
|
10 Bps lower
|
|
India 2 Year
|
6.81%
|
6.50%
|
30 Bps Lower
|
As above table shows-
Crude oil prices have surged nearly 12% from last policy levels to 69.05
levels. Interestingly, petrol prices for general public has been insulated from
rising crude. Mumbai petrol prices rose just INR 2.50 from INR 76 per liter on
7th Feb to INR 78.50 per liter today. This is just one of many consequences
of elections.
Transmission over Rate cut?
RBI’s decision to infuse
durable liquidity using USDINR Buy/Sell swap has lead to faster transmission of
rate in short term bond yields. India’s 2 year bond yield has corrected nearly 30
bps to 6.50% against 6.80% levels after Feb policy. It is important to note
that as much as 20 bps decline in 2 year bond came after announcement of
buy/sell swap. Clearly, RBI swap action has led to significant decline in
short-term yields.
Though, lower inflation
numbers have provide ample space for rate cut but RBI MPC’s should ‘play-out
current session with caution before taking fresh guard after election results’.
