Goldman Sachs View Unchanged Post Friday's Policy Announcement

The US bank keeps its RBI outlook unchanged post Friday's hawkish hold from the central bank. It looks for rate cuts in Q4 (calendar year ) 2024, see below for more details.

"The RBI MPC unanimously voted to keep the policy repo rate unchanged at 6.50% at the October meeting, in line with our and consensus expectation. Governor Das firmly reiterated the commitment to the 4% inflation target in a hawkish guidance. It also retained the policy stance of "withdrawal of accommodation”. The RBI kept its GDP growth forecast for fiscal year 2023-24[1] (FY24) unchanged at 6.5% yoy (GSe: 6.2% yoy), increased its inflation forecast for Q2 FY24 by 20bp and cut Q3 FY24 by 10bp to keep the annual forecast unchanged at 5.4% yoy (GSe: 5.5%). Governor Das expressed concern about skewed liquidity distribution in the banking system and the need to monitor high growth in personal loans for any nascent signs of stress. The RBI may also consider government bond sales to manage liquidity, which, in our view, will partly offset the incremental demand for bonds from FIIs due to India's index inclusion next year. In our baseline scenario, we continue to expect the RBI to stay on hold for the rest of CY23, taking comfort from declining food inflation and sub-5% core CPI inflation. Most of the impact of the food and oil supply shocks is likely to be absorbed by fiscal policy rather than being passed on to the consumer, in our view. Going forward we expect core inflation to remain sticky, but below 5% yoy, on elevated oil prices. We continue to expect the policy repo rate easing cycle in India to only start from Q4 CY24 with a 25bp cut, followed by two 25bp cuts each in Q1 and Q2 CY25, with the RBI on hold at 5.75% repo rate thereafter to reassess the inflation outlook."