RBI Policy Stance Largely Dependent On How Core Inflation Evolves

The RBI meeting has largely unfolded as the consensus expected. Rates were left on hold at 6.50%, as projected by all economists surveyed. The decision to hold rates was agreed by all 6 MPC members. 5 out of 6 agreed to keep the policy stance unchanged, that is focused on 'withdrawal of accommodation'. Presumably the dissenter wanted to shift to a neutral stance. Maintaining the withdrawal of accommodation stance was the sell-side consensus and ours as well.

• Governor Das stated tighter policy settings were helpful (particularly the positive real rate) in bringing down inflation pressures. However, Das stated durable disinflation in core inflation is needed to meet the inflation target.
• There are uncertainties in terms of the monsoon season, while inflation risks were cited as evenly balanced.
• The current financial year inflation forecast was nudged down to 5.1% from 5.2%. Importantly Das noted that inflation being within the tolerance band was not enough and that the central bank will act to keep expectations anchored.
• On the growth front, Das sounded quite upbeat, although the current financial year growth forecast was left unchanged at 6.5%. Das sounded upbeat on the capex outlook, and stated net exports would be less of a drag going forward.
• All in all, there is scope for the RBI to move to a neutral policy setting in coming meetings, but a further easing in core inflation is likely needed to justify such a shift.