In its latest policy review, the Reserve Bank of India (RBI), expectedly, left the repo rate and the cash reserve ratio unchanged at 6.75% and 4% respectively. The central bank's advice to the government on inflation and fiscal discipline, however, spooked the market. The yield on 10-year government bonds moved up six basis points (bps) to 7.85%.
Even though there will be a short-term spike in inflation because of the Seventh Pay Commission recommendations, consumer inflation is likely to remain close to the RBI's 5% target for 2016-17. "The complete pass through of commodity prices has not happened, so the downward pressure on consumer price inflation will continue," says R. Sivakumar, Head, Fixed Income, Axis Bank Mutual Fund. After two years of poor monsoon, there is also hope that the rains will be good this year
