We expect CPI & WPI inflation would drop significantly due to fall in food inflation

Views on monetary policy by Kunal Shah, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance Limited

RBI has hiked policy rates by 25bps as per the expectations, the stance has moved by a margin from growth concerns to worries on high core inflation. The move comes at the time when bond markets were stuck with volatile macro variables and new framework proposed by deputy Governor. RBI has indicated that at current level of repo rate they are comfortable to guide the system that as per their forecast of inflation for next 12months monetary stance will remain unchanged, RBI also indicated that if inflation drops below their expected path they may even ease in future. For bond markets this will be positive news as uncertainty on extent of hikes will be removed and if inflation does indeed fall sharply expectations on rate cuts will emerge.

We expect CPI & WPI inflation would drop significantly due to fall in food inflation, however sharp fall beyond range expected by RBI can't be predicted with certainty and hence we expect bond yields will not be in a hurry to drift in either direction.

On external front, risk off sentiments have emerged again and rupee has deprecated accordingly however since fundamentals of economy have improved on relative basis rupee should not react sharply as seen in Q2, we expect RBI may not take any tightening measures to protect the currency.

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