April policy: Focus on communication

I do not expect the Reserve Bank of India (RBI) to cut interest rates in the April policy. Data since the March rate cut indicates that CPI inflation quickened somewhat. I believe, a large part of disinflation is behind us and core inflation has bottomed out. I expect headline inflation prints to be ranged in H1FY16 before edging up to just below RBI's target of six per cent in Q4FY16.

There might be scope for another 25-basis point rate cut but only by June, after RBI assesses the impact of unseasonal rains on food prices. Thus, the April policy could be all about RBI communication.

This is critical for two reasons.  First, RBI has stepped up its forex intervention in the current quarter, likely buying foreign currency worth Rs 180,000 crore, compared to Rs 170,000 crore in the first three quarters of FY15.

Further, much of this intervention is unsterilised. RBI sold government bonds worth Rs 59,200 crore between April and December, but since then it has sold just Rs 3,550 crore worth of bonds. 

While the pace of forex intervention might be dictated by a quarterly current account surplus and global monetary policy divergence, the absence of sterilisation is puzzling.

Second, RBI last week, sold two short-end bonds and replaced them with a long-end bond in a transaction with the government. It is possible that RBI wanted to minimise government's refinancing cost and maintain its rupee asset size. 

However, the second leg of this transaction contravenes the Fiscal Responsibility and Budget Management (FRBM) Act, in my view. The Act specifically forbade RBI to buy bonds directly from the government except on grounds of national security, national calamity or other such exceptions. Since such grounds are not evident at present, I believe RBI has engaged in de facto monetisation, contrary to the spirit of the FRBM Act.

Taken together, these developments imply RBI is pursuing multiple objectives, often at odds with its inflation objective.  After the currency crisis of 2013, RBI and the government repaired India's macro fundamentals with a decisive move towards inflation targeting. The danger now is RBI might be perceived to be harking back to a tactical, multiple indicator approach.  The central bank would do well to address such perceptions at the April policy. 

The author is head of research at ICICI Securities Primary Dealership. The views expressed are personal.