The Reserve Bank of India's monetary policy must remain focused on inflation control and INR stability in coming month, says a DBS note. The central bank cut its policy rate in April, but economic conditions have not allowed it to lower rates further. "The bottom-line is that policy rates will be biased to the downside but will only drift lower to the extent inflation allows," the house says. It believes another 100-bp of cut in the repo rate is likely by end-2013. DBS warns that "a slow external environment and twin deficits continue to challenge India and could cost it its investment grade rating if they persist." India's trade deficit in FY12 was at a record $185 billion. Still, as market sentiment improves, capital flows should return to Asia in a modest way in 2013. This would provide a better backdrop for growth, though inflation will continue to be an issue owing to structural, supply-side reasons as much or more than to demand-side/monetary policy.
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