RBI likely to hit the pause button in its next monetary policy review

According to BNP Paribas, the recent decline in inflation, driven largely by food prices, gives the RBI room to pause monetary tightening

The Reserve Bank is likely to hit the pause button in its next monetary policy review on April 1, as the decline in inflation may give the central Bank "room to pause monetary tightening," says a BNP Paribas report.

According to the financial services major, the recent decline in inflation, driven largely by food prices, gives the RBI room to pause monetary tightening.

"As per RBI guidance, we do not expect it to increase rates in April, and expect just one more 25 bps (0.25%) rate hike from the RBI this policy cycle," BNP Paribas said in a research note.

Wholesale inflation eased to a seven-month low of 5.05% in January, on decline in the rate of price rise in food articles, mainly vegetables.

This is the second straight month of decline in wholesale price based inflation. The WPI was at 6.16% in December.

On Indian equity markets, the report said that "with external sectors looking much better and inflation under control, we believe that the next catalyst for the Indian market will be the election results (May 2014)".

According to the global brokerage firm, India's earnings environment has also improved and this coupled with a better macro outlook leads us to upgrade India to an "overweight" along with Hong Kong, Taiwan, Indonesia and Philippines.

The report further noted that actions of policymakers since September 2013 have helped the Indian currency regain investor credibility, and tight curbs on gold imports coupled with improved merchandise and service exports sharply reduced the current account deficit.

Moreover, RBI's mobilisation of forex reserves via non- resident deposits also had a salutary effect on India's external risk metrics, the report said.