India: RBI still on the fence – Nomura

Analysts at Nomura note that the RBI’s MPC voted 5-1 in favour of leaving the repo rate unchanged at 6.00%, as expected.

Key Quotes

“Michael Patra (hawk) dissented in favour of a 25bp rate hike. The RBI flagged upside risks to inflation, but maintained its “neutral” policy stance because (1) while inflation may overshoot in the near term, it expects end-FY19 inflation at ~4.5%, and (2) it is still waiting for more clarity on the minimum support price mechanism. Hence, it remains in wait-and-see mode.”

“The RBI revised up its inflation projection to 5.1% y-o-y for Q1 2018 (from 4.3-4.7% in H2 FY18 earlier). For FY19 (year-ending March 2019), it projects inflation at 5.1-5.6% in H1 before moderating to 4.5-4.6% in H2 with upside risks. This suggests that the RBI expects inflation to average ~5% in FY19 – above the 4% mid-point target. Meanwhile, the GVA growth projection for FY18 has been marginally reduced to 6.6% y-o-y from 6.7%, while FY19 growth is expected to recover to 7.2%, with balanced risk.”

“Does this change your economic view? No. The RBI will overlook the near-term inflation overshoot and a change in RBI policy is likely only if inflation is significantly above or below the end-FY19 inflation projection of ~4.5%. We see inflation around these levels and so expect policy rates on hold through 2018, although we see a risk of more hawkish rhetoric from the RBI in Q2 when growth and inflation should be higher. Still, near-term risks are biased towards tightening as government policies around food price inflation have shifted from supporting the consumer (keeping food price inflation low) to supporting the producer (preventing food prices from falling too sharply), which could push up food price inflation.”

“Strategy implications? Rates: The RBI policy was less hawkish than the market expectations, in our view. We continue to hold a small position of IGB 6.84 2022 with a stop loss at 7.51%. In NDOIS, we have a bias to add a pay 2yr NDOIS position on top of the 2s5s NDOIS that we continue to hold. FX: The unchanged policy stance should have a limited impact on INR in the near term, but the RBI’s continued vigilance on inflation is a positive for credibility in the medium term.”