J.P. Morgan Views On RBI Post Yesterday's Policy Announcement

The US bank updates its views post yesterday's hawkish RBI hold. It has been expecting a gradual shift towards easier policy settings, see blow for more details:

• J.P. Morgan: "Recall, we had expected that monetary policy tightening would be dialed-back in a three-step process:The first step would be to ensure that overnight money-market rates – which had consistently been trading 30-35 bps above the policy rate since September 2023 – were better aligned with the policy rate. That process has begun in earnest in recent days with the RBI actively undertaking short duration variable rate repos and reverse repo operations. Consequently, overnight rates have eased discernibly in recent days and are better aligned with the policy rate.
• The second stage was a change in stance to “neutral”. While we had not expected a stance change at this policy, we believed the RBI’s tone, in general, might be softer with inflation tracking lower than it had envisaged (the RBI marked down its current quarter inflation from 5.2% to 5% and we expect the final outturn to be a shade even lower). Furthermore, the RBI projects 2024-25 inflation at 4.5% vis-a-vis 5.4% this fiscal year. In the event, though, the RBI hung tough on its tone, likely because its liquidity operations have already done some of the work by softening the effective policy rate.
• The third stage would be a cutting of rates. We don’t expect the first cut till June, and presuming the the Fed has moved by then. Today’s status quo on all fronts reinforces our view that any easing is going to be a second-half phenomenon. Furthermore, there is nothing that forces the RBI to change its stance to neutral before the first cut. It could always cut and change stance at the same meeting.
• All this reinforces our view that while liquidity operations will continue in the near term to ensure overnight money market rates stay closer to the policy rate, any policy rate easing will occur only later in the year.