The bias of RBI towards higher interest rates and thus a stronger INR continues with the latest monetary policy of April 6th. The “premature” change in stance towards Neutral in the previous policy and the tough undertone in the recent policy statements belies the recent moderation in commodity prices, lack of credit demand from the industrial sector, appreciation of INR and thus lower imported inflation, substantial foreign flows in both INR equities and bonds, lowering core inflation etc. Foreign investors in INR bonds appreciate RBI’s stance, as evidenced by the strong inflows of nearly USD 4 billion in March and USD 1.5 billion already in April. The foreign investors have also been very clearly comforted by the strong sense of political stability for the next 7 years after BJP’s stunning victory in the UP state assembly elections.
RBI has been once again, for the fourth consecutive time, supported unanimously by the independent members of the MPC (Monetary Policy Committee). It may be common in many rate setting committees globally to have a divergence in views but unanimity in votes, but it may be more appreciated by the market in the Indian context to see the votes reflecting the views, particularly by the independent members of the committee. Nonetheless, it is evident that the MPC will maintain its bias towards higher rates and a stronger currency, which will maintain the momentum of global portfolio flows into the country.
We would be surprised, however, if the policy rates are increased in 2017, as long as the crude oil prices remain contained and the US interest rates do not see an unexpected rise.