Expect MPC to maintain status quo on rates and stance, says ICICI Securities

On inflation, he said, “The next inflation reading for January should also be higher than 7 percent, probably slightly lower than 7.35 percent and subsequently it should come off. If you look into the next quarter, we do expect the inflation to come down but it will be a gradual process. If RBI is looking at its target of 4 percent in a very rigid manner then perhaps it will not be before second half of next financial year before we see readings in 4 percent handle. Till then it will be in the 4-6 percent range at least in the first half of next fiscal year.”

With regards to the coronavirus scare, Prasanna said, “I would think that it is definitely one downside risk to growth, which the MPC will acknowledge. The impact is much stronger in Asia than in the rest of the world or than in the US. In Asia, it does look like it is more of a supply side hit. India is outside this supply chain, therefore the direct supply side hit to India might be on the lower side but clearly sentiment is hit and there will be a slowdown in export growth. So to that extent, I don’t expect the RBI to change their growth forecast but they might flag off downside risk to those forecasts.”

In terms of Operation Twist, he noted, “At this point of time, the expectation is that maybe RBI is not going to do any more of these operations at least for quite a few weeks. So, if anything comes out of the press conference, which is different to that expectation, obviously that will have an impact. Otherwise, market is going into this policy thinking it is a status quo policy, it is more or less a non-event, so I wouldn’t expect too much of a reaction post-policy if the policy sticks to that script."

However, if again RBI explicitly rules out some of these operations going forward then that can be negative. Conversely, again they can keep the chances of a rate cut open – if they play down these inflation rise as transient then that will be taken as very positively by the market, he added.

When asked how many more rate cuts he was factoring in for the rest of the calendar year, he replied, “We still expect one more rate cut in the next fiscal year and that is 15-25 basis points (bps). We do think that is like a residual cut or the last cut but for us it is not just the policy which matters but also growth print which matters. So, if we see that the growth recovery process is getting delayed or getting stretched out then the chances of a rate cut into the next fiscal year go up.”