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MOSL: ECOSCOPE-RBI keeps policy rates and stance unchanged-Feb meeting decision would need much deliberation

ECOSCOPE: RBI keeps policy rates and stance unchanged; Feb meeting decision would need much deliberation – fiscal discipline (=weak GDP) could lead to a rate cut

 

• As expected, the RBI kept its policy rates and stance unchanged. While the decision to keep the policy rate unchanged was unanimous, Dr Ravindra Dholakia voted to change the stance to neutral.
• What, however, took us by surprise was the RBI's economic projections. The central bank sharply cut its 2HFY19 CPI inflation forecast from 3.9%-4.5% to 2.7%-3.2%. However, it maintained its 2HFY19 and FY19 GDP growth projections at 7.2-7.3% and 7.4%, respectively.
• While CPI will be sub-3% in Nov-Dec'18, it could move toward 4% by Mar'19 - higher than the RBI's projections - in our view. Besides, we expect real GDP growth to come in at ~6.5% in 2HFY19, well below the RBI's estimate of 7.2-7.3%.
• Accordingly, the February policy decision would need considerable deliberation, wherein the fiscal discipline and the FY20 Union Budget will be more important than inflation. If inflation evolves in line with the RBI's expectations and the government maintains fiscal discipline (implying weak GDP growth), it could set the stage for a rate cut.