India’s inflation rate dropped below 5 per cent for the first time in three months, giving the central bank room to keep interest rates on hold for longer while providing relief to battered bond investors. Government data on Monday showed inflation at 4.44 per cent in February, lower than the 5.07 per cent pace in January and below the 4.7 per cent estimate of economists polled by Bloomberg News. The easing for the second straight month offers bond investors in India — the worst performing market among major Asian economies — something of a temporary cheer. The benchmark 10-year bond yield fell three basis points to 7.60 per cent. “The sharp dip in retail inflation has reinforced our expectation that the MPC would keep the repo rate unchanged in the upcoming policy review in April, which may prompt a further easing of bond yields in the immediate term,” Aditi Nayar, economist at ICRA Ltd. said referring to the central bank’s Monetary Policy Committee that’s scheduled to meet April 4-5. Most analysts and the Reserve Bank of India itself expect inflationary pressures to gather steam in coming months. The central bank expects inflation to reach 5.1-5.6 per cent in the first half of the financial year starting April 1, before easing in the second half. The RBI targets inflation over the medium term at 4 per cent with an upper limit of 6 per cent and a lower threshold of 2 per cent. Last month, one member of the six-member monetary policy committee voted for a rate hike, another gave up his call for rate cuts while Deputy Governor in charge of monetary policy, Viral Acharya, also veered more toward the hawkish camp. The rest, for now, appeared neutral.
Source: Business Standard