India Economics:RBI policy review ?C Neutral not dovish

Conclusion: RBI kept policy rates on hold and lowered the growth forecast forFY18, on expected lines. However, the RBI marginally raised the 2HFY18inflation forecasts by10-20bps. We read the policy statement as neutral ratherthan dovish. While we continue to build in one more 25bp rate cut in FY18, it willbe data dependant. With bond yields bottoming out in the near term given theneutral policy tone, equity valuations have less room to expand with directimplications for sectors such as NBFCs which have thrived on the sustained fallin bulk borrowing costs.

    Details

    RBI kept policy rates on hold – in line with expectations: The RBI kept policyrates unchanged with the repo rate (the rate at which the RBI injects liquidity) at6.0% in the policy review today. Accordingly, the reverse repo and marginalstanding facility (MSF) rate stand unchanged at 5.75% and 6.25%, respectively.Five members of the MPC voted for status quo while one member (RavindraDholakia) voted for a 25bp rate cut. The minutes of the MPC’s meeting will bepublished on 18October and will record the views of each member.

    RBI lowered its growth estimate and marginally raised inflationprojections: Taking into account the weak growth during the QE Jun, the RBIlowered its FY18GVA growth forecast to 6.7% from 7.3% earlier, expecting arecovery in growth in 2HFY18. While growth expectation was lowered, the RBImarginally increased its inflation expectations for 2HFY18to 4.2-4.6% (from 4-4.5% earlier), building in the impact of higher house rent allowances by centre.

    Neutral policy stance retained: The MPC retained the neutral stance as ithighlighted both upside and downside risks to inflation and asserted itscommitment to keep inflation close to the 4% mark on a durable basis.

    Our view – RBI policy statement neutral (not dovish) and policy action tobe data dependant: We believe that the RBI faces a dilemma of managing aweaker-than-expected growth outlook and keeping inflation trajectory closer toits stated medium tern target of 4%. We view the policy statement as neutralrather than dovish as indicated by some commentators. In this context, the RBIis likely to be data dependant to assess the evolving growth – inflation dynamics.In our view, inflation will likely hover in the 4-4.5% range and growth recovery islikely to be tepid, (our estimate of growth at 6.7% in FY18, 7.2% in FY19), whichcreates room for one more rate cut of 25bps in FY18.