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Analysts at TD Securities point out that the RBI hiked the benchmark repo rate by 25bps to 6.50% as  they and the consensus had expected.

Key Quotes

“The reverse repo rate was accordingly adjusted 25bps higher to 6.25%. Five members of the MPC voted in favor of the decision against two. Today’s  “decision of the MPC is consistent with the neutral stance of monetary policy,”  given the upside pressure that inflation continues to exhibit.”

“In Q1 of FY2019/20, CPI is expected to move even higher to 5%, in line with the June levels. Amongst the main risk factors for the inflation outlook the RBI mentioned: 1) the  “considerable uncertainty”  around the above average increase of Minimum Support Prices (MSP) granted by the government; 2) the performance of the monsoon, which so fare  “augurs well for food inflation in the medium-term;”  3) the dynamic of oil prices, which, regardless of the recent softening, continues to pose an upside threat to inflation; 4) other fiscal measures, including the government reduction of GST on several items, which may lead to temporary moderation in inflation (hence, a downside revision of the Q1 CPI projections by the RBI); 5) broad based rise in inflation in the categories excluding food and fuel, which denotes robust domestic demand, which is also consistent with the upbeat GDP growth expectations by the RBI; and 6) financial markets volatility.”

“Based on the above, inflation is seen lower in the short term and then around current levels by the start of the next fiscal year. This warrants tighter policy for now, but the RBI has also warned against anticipating too much tightening until the effects of the hikes delivered so far this year are fully transmitted, with a lag of a few quarters, in the real economy. This comment should bode favorably for our forecast of RBI rates to remain unchanged from now onwards.”