Global Conditions (Financial Stability/Growth) & Core CPI Trends Key To RBI Outlook

The RBI surprised the market (at least the economic community) by leaving rates on hold at 6.50%. The majority of economists, and our own bias, was for a +25bps move, although market pricing didn't have a full 25bps move priced in. The RBI put a stronger emphasis on financial stability over still elevated inflation in terms of justification for the on hold outcome. The central bank also wants to assess the impact of previous tightening's (250bps). The decision to hold rates was unanimous among the 6 board members.

• Still 5 out of 6 board members want to keep the focus on 'withdrawal on accommodation'. Hence if there is a further RBI move, in the near term, its likely to be a hike. Note the next policy announcement is on June 8.
• Offshore developments will be watched closely, particularly from a financial stability standpoint. This is likely to be monitored from a global banking standpoint, but also the global growth outlook, particularly given softer signs from the US recently.
• The other watch point will be CPI outcomes. The March print is due next week on the 12th. Base effects should help bring down the headline rate (the market forecast is 5.80% y/y, from 6.44%). The extent to which core measures come down though could have a greater influence on the RBI outlook. We get April inflation on May 12th, which is also before the next policy meeting.
• The RBI nudged its current financial year GDP forecast to 6.5% from 6.4%. Inflation was nudged down to 5.2% from 5.3%.