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MOSL: ECOSCOPE-RBI maintains status quo, changes stance to tightening-Fiscal slippage to determine rate hikes in FY19

ECOSCOPE: RBI maintains status quo, changes stance to tightening; Fiscal slippage to determine rate hikes in FY19

 

• In stark contrast to market consensus and in line with our view, the RBI kept its policy rates unchanged. It, however, changed its policy stance from ‘neutral’ to ‘calibrated tightening,’ which diluted the impact of maintaining status quo on policy rates.
• This is also in line with the RBI lowering its FY19 CPI-inflation forecast from 4.8% earlier to ~4.3% now. Interestingly, notwithstanding higher 1QFY19 growth, the RBI has maintained its FY19 GDP growth estimate at 7.4%, implying slower than previously forecasted growth in the remaining part of FY19.
• Overall, we believe that the RBI has taken the right but difficult decision. It, however, needs to give further solid signals to the markets toward its intention to help domestic liquidity and stabilize the financial system until inflation remains comfortable. This is why we are uncomfortable with the change in stance to a hawkish one.
• According to our projections, CPI inflation will remain under 4% until Dec’18, which gives the RBI no reason to hike rates in the remaining part of FY19. However, we believe that fiscal slippage may prompt the RBI to hike rates.