‘RBI’s neutral stance is a surprise’

Published: June 7, 2018 3:24:57 AM

Meanwhile, the RBI has revised its CPI inflation forecast upwards to 4.8-4.9% y-o-y in H1FY19 (from 4.7-5.1%) and H2 projection revised up to 4.7% (from 4.4%).

RBI, neutral price, repo rate hike, GDPThe MPC voted 6-0 in favour of hiking the repo rate by 25 bps to 6.25%, in contrast to consensus and our expectations of no change, although the decision was a close call. (Reuters)

The MPC voted 6-0 in favour of hiking the repo rate by 25 bps to 6.25%, in contrast to consensus and our expectations of no change, although the decision was a close call. It retained its “neutral” stance, which is a surprise relative to our expectations of a stance change to “withdrawal of accommodation”. The policy statement cited rising oil prices and higher core inflation momentum amid signs of stronger growth as the main reason for the decision to hike rates.

The RBI retained its GDP growth projection expecting it to strengthen to 7.4% y-o-y in FY19 (year-ending March 2019) from 6.6% in FY18, although the H1 projection has been raised to 7.5-7.6% (from 7.3-7.4% previously) and H2 projection tightened to 7.3-7.4% (from 7.3-7.6%), with risks evenly balanced.

Meanwhile, the RBI has revised its CPI inflation forecast upwards to 4.8-4.9% y-o-y in H1FY19 (from 4.7-5.1%) and H2 projection revised up to 4.7% (from 4.4%). The RBI’s decision to maintain a “neutral” stance suggests that it does not want to signal that it is embarking on a tightening cycle and that it remains data-dependent.

We believe that both growth and inflation are likely to head higher in the coming months, paving the way for another 25 bps rate hike in August. However, the ongoing tightening of financial conditions, higher oil prices and political uncertainty are likely to slow economic activity after September, in our view. Hence, we expect a pause thereafter. Global factors (oil prices, capital flows) are the main risks to this view.

By: Sonal Varma

The writer is MD and chief economist at Nomura

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