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RBI kept policy unchanged, a surprise compared to TD Securities and consensus expectations, though close to half polled expected RBI to stay pat. On the margin the decision is negative for bonds, but growth pressures will likely limit any fallout, while equities and INR look resilient. USD/INR keeps its range around 74.90, posting small gains on a daily basis.

Key quotes

“We had assumed RBI would prioritise growth over inflation. However, RBI clearly chose inflation over growth. Both the repo and reverse repo rates were left unchanged at 4% and 3.35%, respectively, maintaining an accommodative stance in a unanimous decision. TD and consensus expected 25bp cuts in both rates, though almost half of those polled expected no change.”

“RBI chose to keep its powder dry despite a renewed worsening in activity, instead focussing on the recent, but likely short-lived, spike in inflation. The Bank chose to focus on liquidity intermediation and transmission measures to improve the flow of credit. We think this was a missed opportunity and expect RBI to cut either at or before the next scheduled meeting in October.”

“The market impact from today’s decision will on the margin be more negative for bonds, but growth pressures are likely to limit any fallout. Equities look resilient, INR continues to benefit from USD weakness and strong inflows into India’s equity market as well as a more favourable carry advantage.”

“The only thing prevening a stronger INR is likely intervention from the RBI. We expect such intervention to lessen however, especially as INR has cheapened in trade weighted terms over recent weeks.”