Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Life Insurance Company Limited
"For April, May and June - all together, markets had assumed inflation to be in the 5-6% range, but it came in higher, in the 6-7.5% range, well above RBI's 4% target. Incorporating this, inflation is likely to average 5% in FY21, versus earlier expectations of 4% previously.
The general expectation is that the inflation up move is due to supply shocks while demand pressures will remain leading to lower inflation by Q4 of FY21. In addition the base effect will also be in play during later part of FY21. Inflation may need closer monitoring since real rates after 6 long years are moving into the negative territory, inflation expectations are an important driver of inflation and credit flows to firms to avoid supply disruptions would be required but are contingent on the risk averse banking system at this stage. Vegetable inflation will also have to be closely watched.
The combined fiscal deficit is expected in the range of 12-14% during FY21 due to shortfall in revenues as well as slowdown expected. From a market perspective the additional supply will be taken care of through OMO's is the expectation.
After cutting rates by 115bps over two consecutive policy meetings, the RBI will pause in the upcoming 6 August meeting. It may revise up its inflation forecast for the year. Having said that, due to growth slowdown, it is expected to hold on to an accommodative stance and continue to keep domestic liquidity at surplus.
If activity remains subdued and the seasonal spike in vegetable prices reverses over the next few months, the RBI is likely to cut rates later during the year. A range of 25-50 basis point cut can be expected depending on evolving growth inflation dynamics over the rest of FY21."