Despite falling inflation, Kotak Mahindra Bank’s treasury chief suggested the RBI may decrease interest rates only at the end of the year.
Inflation is down, but the core is not. “Some of it is base effect, which they already knew, and they did not hike at the same pace as Fed,” said Rajeev Mohan, president of treasury and global markets.
“The RBI may hold on for a longer period and maybe towards the end of this fiscal, the RBI may go for a rate cut.”
The RBI lifted its benchmark policy rate by 250 basis points (bps) in the previous financial year but paused in April, defying market expectations of a 25 bps hike.
In April, India’s retail inflation fell to an 18-month low of 4.7%, with May expected to dip to 4.2%.
The central bank must lower inflation to 4% over the medium term and keep it between 2% and 6%. Retail inflation was above 6% for most of 2018.
With the RBI seeking reserves, Mohan expects the currency to touch its previous record low but not fall further.
Last October, the rupee fell to 83.29 to the dollar.
Mohan expects “transient” dollar demand from Russian money converted by Indian banks.
I think the oil for rupee deal went wrong. However, there are no verifiable reports. “Russian money leaving will temporarily increase dollar demand,” he said.
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