| India Fixed Income: RBI to remain on pause tomorrow
- While benign price pressures keep room open for further accommodation, RBI is likely to maintain a rate pause till the Budget to gain clarity on the fiscal dynamics.
- Lower commodity prices and weak demand are expected to keep RBI on track to meet its Jan-2016 5.8% YoY CPI projection.
- Domestic gilts are likely to trade with caution ahead of the Budget.
RBI to maintain status quo tomorrow; We expect the Reserve Bank of India's (RBI) Jan-2016 5.8% YoY CPI projection to be comfortably achieved due to seasonal correction in vegetable prices, weak global commodity prices and subdued demand (especially rural demand). While the RBI may choose to ignore the inflation impact of 7th Pay Commission (7 PC), it is likely to remain in a wait and watch mode till the Budget to gain clarity on implementation of 7PC and its impact on quality of fiscal consolidation.
Factors supporting the decision: (a) January CPI print to remain sticky at 5.6% YoY Jan-2016 CPI is expected to come in flat at 5.6% YoY (same as the Dec-15). While vegetable prices have already started correcting (on a month-on-month basis), elevated pulses inflation remains the sticking point. Although the Government has undertaken numerous measures, the correction in on-the-ground prices is yet to be witnessed. As mentioned in last policy, RBI is likely to watch for progress on this front.
(b) Weak policy transmission remains a cause for concern Post the December policy meeting, the RBI has delineated the marginal cost of funds rule for determination of base rate in order to improve transmission. However, progress in this regard is yet to be witnessed and is likely to support our call of no action in tomorrow's meeting.
(c) Clarity on impact of 7PC in the Budget is awaited Fiscal dynamic for FY2016 remain comfortable, though implementation of 7PC is likely to pose challenges in the next fiscal. Meanwhile, increased revenues from excise duty hikes on petroleum products could provide support and lead the Government to stick to the roadmap. However, the details on quality of fiscal consolidation would be closely watched by the RBI.
(d) Sharp deterioration in liquidity leaves room open for OMO purchases Liquidity deficit has increased from ~INR 1.3 tn at the start of January to ~INR 1.7 tn currently on account of sharp rise in Government balances. Meanwhile, RBI's OMO purchases have provided some support. We expect liquidity situation to deteriorate further in the coming months. In this regard, the commentary on liquidity will be closely tracked.
Room for further accommodation post Budget We project March-2017 CPI at 5.6% YoY (including 7PC impact). Excluding housing, CPI is projected to decline from 5.4% YoY in March-2016 to 5.1% YoY by the end of next fiscal, which is closer to the RBI's CPI target. Consequently, we maintain our post-Budget rate cut call.
Domestic bond markets likely to remain cautious ahead of Budget Global market volatility has weighed on Rupee and also kept domestic bonds under pressure. Further, sentiment is likely to remain cautious ahead of the Budget. Meanwhile, OMO purchases are expected to provide some support. On balance, we expect the 10Y G-Sec to trade in the range of 7.50%-7.75% in the near term.
Yield curve has steepened further 
Source: Reuters', ICICI Bank Research
Benign price pressures to keep room open for post-Budget rate cut 
Source: Bloomberg, ICICI Bank Research
Please refer to the attached document for a detailed report | 
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