All eyes are now on the May inflation data expected on July 16, as it is crucial to the Reserve Bank of India's monetary policy review. Economists feel that the central bank is unlikely to move key rates in its monetary policy review on July 31 even though industrial product output grew marginally higher at 2.4% in Mayfrom the month ago period. However, capital goods output fell 7.7%, while that for consumer goods grew 4.3%.
Shubhada Rao, Chief Economist, Yes Bank feels that inflation will anchor market expectations also because RBI has been guiding the market to not to expect rate cut almost immediately. She is also expecting liquidity to remain relatively comfortable till August.
"So liquidity remaining relatively comfortable and inflation remaining at about 7% plus I would think there is very limited case to build on expectations of a rate cut at this juncture. I would think whether RBI has made up its mind or not but we definitely think that given the context that RBI itself has presented a rate cut seems highly unlikely," she said in an interview to CNBC-TV18.
Neeraj Gambhir, Managing Director & Co-Head, Fixed Income India, Normura, too, agrees that there is likely to be RBI inaction this time around. He argues that marginally higher crude prices, better-than expected IIP and weak currency don’t make a case for any sort of rate action in the forthcoming policy.
Inflation and growth outlook
Samiran Chakrabarty, Head of Research, Standard Chartered Bank is looking at 5.7% which is in line with last quarter primarily because there is a possibility that the 5.3% itself might be revised upwards.
Talking about the May IIP, Chakrabarty says, "There are one or two things which are positive, particularly if you look at cement coming in at 11% growth and sustaining for almost 2-3 months now typically this and steel also doing relatively better."However, Rao believes it is going to be a cautious outlook because capital goods is one random number which ends up swinging quite a few things.
"It has come in expectation in negative zone but from the drivers of growth exports lack, investment is not really picking up. We were solely dependent on consumption as the driver and if that begins to look weaker going forward in the coming months because of the outlook on rural economy, leveraging on the monsoon performance I think the outlook would continue to remain cautious in," Rao reasons.
Bonds market
Gambhir feels that probability of a diesel price hike and if the hike will change any RBI action. He asserts that if nothing of the two happens then the market will probably be in the same range.
Gambhir also adds that there could be some expectations build up post the Presidential poll which could lead to some rally in the bond markets. "I feel the market and the policy could create quite range bound, but the bias would generally be towards downwards because of the overall growth scenario and the fact that we are in a very weak sort of economic environment. We are seeing far less impact on the bonds because the supply is huge," he explains.
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