INDIA RATE PREVIEW: Forward Guidance in Focus, Economists Say

RBI will cut repo rate by 25 bps to 7.25% tomorrow, according to 24 of 31 economists in Bloomberg survey; one sees 50-bps cut while six predict no change; RBI will keep CRR at 4%, 22 of 23 economists say, with 1 seeing 50-bps cut.

  • Local rates market outlook:
    • One-year onshore OIS is pricing in 50 bps of cuts over next year, including 25 bps at June 2 meeting, according to Vivek Rajpal, strategist at Nomura, in an interview
  • Key points for RBI:
    • Monetary transmission: Major banks have cut their base rates by 15-25 bps in response to RBI’s easing this year
    • Inflation, strength of monsoon: CPI rose 4.87% y/y in April after revised 5.25% gain in March; moderate El Nino conditions to continue during monsoon
    • Measures for making more power, land available: Modi’s manufacturing dream confronts ending red tape nightmare
    • Reducing stalled investments: Projects worth 26.5t rupees stalled in India, study says
    • Normalization of U.S. monetary policy: Yellen says Fed on course for 2015 rate rise even after slowdown
  • Expectations for RBI’s forward guidance:
    • RBI could reiterate its accommodative stance and indicate additional space for easing, Anurag Jha, economist at Citi, writes in May 26 note; RBI may adopt a cautious tone in wake of sub-par monsoon and ahead of possible Fed lift-off
    • RBI may signal pause in rate-cut cycle due to factors such as uncertainty about monsoon and its impact on inflation and the need to establish credibility of new inflation target, Goldman Sachs writes in May 30 note

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