Policy Steady, But Hawkish Undertones

As widely expected by the sell-side, the RBI has held rates steady at 6.50%. The decision to hold rates was unanimous. While 5 out of 6 board members were in favor of maintaining the current stance - 'withdrawal of accommodation'. The outcome was largely expected, although the revision higher in the inflation forecast and moves to mop up excess liquidity were hawkish developments.

• Not surprisingly much of the focus was on the RBI's inflation outlook. Das stated the central bank has revised the FY 24 inflation forecast to 5.4% from 5.1%. This due to surging food prices, particularly in the vegetable space.
• Das stated vegetable prices can come down quickly in coming months, but is mindful of the impact on inflation expectations. The RBI can look through such shocks but if they persist the central bank will have to act. Das also noted other watch points for the RBI, - el nino and global food prices. He stated the central bank was resolute in bringing inflation back to the 4% target (it isn't enough just to bring it into the target band, 2-6%).
• The RBI kept the FY 24 growth projection unchanged at 6.5%. Das sounded upbeat on the domestic economy, although said weaker external conditions need to be watched.
• Das also announced a temporary measure to absorb excess liquidity in the banking system, generated by the return of 2000-rupee notes from earlier in the year. From August 12 banks will maintain an incremental cash reserve ration of 10% on the increase in their deposits seen in the May 19 to July 28 period (which is when the withdrawal of the 2000-ruppe notes started). This is in addition to the 4.5% cash reserve ratio that banks already have to maintain. Das stated excess liquidity can pose a threat to price stability, and that the incremental rule will be reviewed on September 8.
• Indian equities have retreated on this news. The Sensex off by 0.60%, with bank stocks under pressure. USD/INR is steady around 82.80/85. India's 10yr yield is a touch higher from session lows, last near 7.17%.