RBI policy review: Inflation may dampen rate cut hopes, says Morgan Stanley

The Reserve Bank may stay on hold at its ensuing policy review meet next week as inflation is expected to trend higher in the coming months leaving little space for further easing, says a Morgan Stanley report.

According to the global financial services major, the central bank is expected to keep key policy rates unchanged while maintaining its neutral policy stance.

The RBI reduced the repo rate by 0.25 per cent to 6 per cent in August, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low.

"We expect the RBI to stay on hold at the upcoming meeting as rising incoming inflation and projections of further acceleration in inflation ahead will mean that there would be limited space for further easing," Morgan Stanley said in the research note.

The report further noted that the recent reports of potential fiscal easing would also have to be assessed by the central bank for any potential impact on inflation, and would hence be another factor for the RBI to keep rates on hold.

With the weak GDP growth in the June quarter(5.7 per cent) this year, the debate on providing stimulus to the economy has reemerged. However, the prospects of a rate cut had been dampened by the August CPI inflation print of 3.4 per cent.

"Indeed, with inflation expected to rise closer towards the RBI's inflation target, we do not think there is much room to ease monetary policy further," the report said.

The next policy review meet is scheduled for October 3-4.

"We stay medium-term bullish on India rates and forex, as we expect macro fundamentals of positive real rates and balance of payments to remain supportive," the report said.