Barclays: RBI to Hold Rates in Aug on Strong FCNR(B) Inflows

Mumbai, Jul 28 (PTI) The Reserve Bank of India (RBI) is likely to leave the benchmark interest rate unchanged at its August monetary policy review despite elevated inflation, as strong foreign capital inflows have eased concerns over the rupee, giving the central bank room to continue with a neutral pause, according to a report.

Banks have reportedly mobilised nearly USD 32 billion, largely through FCNR(B) deposits, while government securities have attracted more than USD 7 billion in foreign inflows since the RBI announced measures to attract overseas capital last month, foreign brokerage Barclays said.

The improved inflows are erasing the tail risk for the currency, it said.

Barclays said it expects the RBI to continue with its neutral pause as the uncertainty triggered by the re-escalation of tensions in the Middle East and the intensifying El Nino warrants caution.

"We think the best thing to do amid this volatility is nothing," the report said.


Despite the recent uptick in inflation, Barclays believes policymakers are unlikely to respond immediately, with a rate hike not yet warranted.

It pointed to RBI Governor Sanjay Malhotra's recent remarks that inflation remains the central bank's foremost priority, but price pressures are not yet broad-based or entrenched, while discussions around imminent tightening are "premature".

According to the report, the expected acceleration in inflation over the coming months could exaggerate underlying price pressures as base effects are extraordinarily unfavourable. It also expects the MPC to closely monitor risks from El Nino and higher crude oil prices amid geopolitical tensions.

Barclays warned that unless rainfall improves materially through August, kharif output risks will become more acute, though policymakers are likely to treat temporary food price spikes differently from sustained inflationary pressures.

The report also said financial conditions have tightened over the past week and are back to levels seen during the June policy review after higher oil prices offset the gains from the RBI's June measures. However, it believes the improvement in foreign inflows should allow the MPC to remain on pause at the upcoming meeting.