The MPC voted unanimously (6-0) to hike the repo rate by 25bp to 6.25%, a slight surprise to expectations of continuation of the status quo, although the decision was a close call, according to analysts at Nomura.
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“Given domestic inflationary pressures and external risks, the pre-emptive move is the right one, in our view. Despite the rate hike, the RBI retained a “neutral” policy stance, indicating it remains “data dependent” and suggesting to us that it is not embarking on a tightening cycle.”
“The RBI’s policy statement reveals that this course-correction was primarily triggered by the surprise hardening of core inflation in April, and escalation of crude oil prices. In tandem with this policy outlook, the RBI has revised up its CPI inflation forecast to 4.8- 4.9% y-o-y in H1FY19 (from 4.7-5.1%) and its H2 projection to 4.7% (from 4.4%). While the GDP growth projection has been retained at 7.4% for FY19, (year-ending March 2019), the H1 projection has been raised to 7.5-7.6% (from 7.3-7.4% previously) and the H2 projection tightened to 7.3-7.4% (from 7.3-7.6%), with risks evenly balanced.”
“While the hike has come earlier than expected, we still expect another 25bp hike at the 1 August policy review meeting, followed by continuation of the status quo. Growth and inflation are still heading higher, which should result in further front-loaded policy tightening. However, we expect recent tightening of financial conditions and higher oil prices to slow growth in H2 FY19 and hence see rates on hold after August. In our view, the RBI will need to consider tightening beyond this stage if oil prices move above $80/bbl sustainably, if the government embarks on populist policies ahead of elections that entail fiscal slippage, and if balance-of-payments pressures re-emerge.”
“Our confidence in INR is strengthened after this hike. Positivity comes from INR valuations, stabilisation of global risk conditions, lower oil prices, a significant unwinding of foreign investor bond and equity positioning, and ample FX reserves. Rates strategy: We expect the market to continue pricing in a more-than-50% probability of a hike in August while the RBI’s neutral stance will make it difficult to reprice terminal rate expectations significantly from current levels. This supports flatter curves in our view. On bonds, we suggest maintaining a neutral to modest underweight stance.”
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