FREE

MOSL: ECOSCOPE-RBI surprises with a rate hike; Neutral stance raises uncertainty over future moves

ECOSCOPE: RBI surprises with a rate hike; Neutral stance raises uncertainty over future moves

 

• In contrast to market (and our) expectation, the Monetary Policy Committee (MPC) hiked policy rates by 25bp today. The decision to hike rates was taken unanimously, with all six MPC members voting in favor of the move.
• The decision, however, is not justified by economic forecasts, as the central bank has only marginally revised up its FY19 inflation forecast (to 4.8% from 4.65% earlier). Besides, it has maintained its GDP growth forecast at 7.4% for FY19.
• Further, none of the five inflationary risks highlighted by the RBI justify a rate hike at this stage, in our view. One of these risks is benign (monsoon), one will be looked through (HRA statistical impact), another one has had muted effects so far (higher household inflationary expectations) and the remaining two are uncertain at this stage (global financial markets and MSP hikes).
• We believe that if rates are hiked to stem currency depreciation (to lure foreign investors with higher return) or mitigate core inflation (by hurting demand), then a 25bp hike appears insufficient – many more hikes may be required. This, along with the MPC’s decision to maintain a neutral stance, brings in uncertainty about further hikes.