The Reserve Bank of India may remain in a "wait and watch" mode at its monetary policy meeting on Monday as inflationary pressures may stay elevated while the government makes little effort on fiscal consolidation, says Kotak Mahindra Bank in a note. India's July industrial output growth, due Wednesday, is tipped to contract 0.3% on-year, while August inflation, due Friday, is likely at 6.97% on-year. Kotak thinks core, or non-food manufacturing, inflation will continue rising in August, thereby providing little comfort to RBI. "Going ahead, RBI would judge the extent of price pressures that could emerge out of lower agricultural produce and also likely reaction of commodity prices globally to another dose of liquidity surge" due to quantitative easing, it adds. This week will see domestic interbank liquidity being pressured as companies withdraw to pay advance tax. Kotak estimates the tax amount at INR550 billion.
However, this is unlikely to push RBI into policy action as the liquidity gap is not structural and will flow back via government expenditure.
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