India: MPC likely to pause after two straight hikes – Standard Chartered

“India’s Monetary Policy Committee (MPC) hiked the repo rate by 25bps to 6.50%, in line with our expectations, while maintaining a neutral stance. It also remains data-dependent, highlighting the need for vigilance on both inflation and growth risks amid several uncertainties,” Standard Chartered analysts note.

Key quotes

“The only surprise element, in our view, was the MPC’s statement that risks to its inflation projections are evenly balanced. This is the first time since December 2017 that the MPC sees risks to inflation as balanced rather than to the upside.”

“This, in our view, should not be interpreted as a drop in the MPC’s vigil on inflation. In fact, the policy statement highlighted a list of factors that could push inflation higher than its forecasts for FY19. These include rising crude oil prices, a sharp increase in procurement prices, weak crop sowing, a wider fiscal deficit, and increased volatility in financial markets.”

“Given our FY19 CPI inflation forecast of 4.8% (H2: 4.5%), which is similar to the MPC’s projection, and as real rates are now at 175bps, we do not expect any further policy rate changes in FY19. In addition, the Deputy Governor’s emphasis that transmission of monetary policy happens with a lag indicates that the MPC is in no rush to hike rates further near-term, unless inflation data surprises significantly to the upside. While the risk of more hikes cannot be completely ruled out, we think the markets can take a breather for now.”