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We expect the Central bank to pause during the February 2015 monetary policy review, while maintaining a dovish tone, and resume cutting the repo rate by a further 50 basis points (bps) after the presentation of the Union Budget.
The Budget for 2015-16 assumes substantial importance, as it would reveal the balance between the new government's plans to stimulate domestic growth impulses through infrastructure spending and the medium-term fiscal consolidation goals.
The Reserve Bank of India (RBI) cut the Repo rate by 25 bps on January 15, 2015, three weeks ahead of the scheduled policy review. This surprise move by RBI was prompted by a lower-than-expected Consumer Price Index (CPI) inflation print for December 2014, released earlier in that week, and a reiteration of the central government's commitment to meeting the current financial year's fiscal deficit target.
The RBI's commentary in the February 2015 policy on the impact of external events on the Indian economy and the expected inflation trajectory for 2015 will be of special interest.
We expect CPI inflation to average six per cent in 2015, assuming a normal monsoon, subdued crude oil prices and some appreciation of the rupee.
The boost to global liquidity, following the European Central Bank's decision to purchase euro 60 billion of bonds each month till September 2016, is likely to revive interest in emerging market assets.
Following an improvement in Indian macro fundamentals, such as a sharp decline in net oil imports, declining inflation and an expected pick-up in economic growth, we expect continued strong foreign flows into Indian assets in 2015, resulting in a possible appreciation of the rupee over the near to medium term.
The writer is managing director and chief executive officer, ICRA Ltd
