Sell-Side Views Post Yesterday's RBI Outcome

Sell-side banks recognize some of the hawkish undertones from the policy meeting, but don't expect fresh rate hikes in response. The inflation spike does risk pushing rate cut expectations further into 2024 though.

Goldman Sachs: "We continue to expect the RBI to remain on hold till end-2023 in our baseline scenario, as the Governor emphasized the MPC's goal is to achieve the inflation target of 4% yoy going forward. The MPC also retained the policy stance of "withdrawal of accommodation” in a 5:1 vote, in line with our expectation, as banking system liquidity remains in surplus. It also temporarily increased the reserve requirement on the incremental net demand and time liabilities (NDTL) of the banking system to absorb the excess liquidity. This outcome on liquidity came in as somewhat more hawkish than expected. Uneven distribution of monsoon and adverse weather given El Niño conditions continue to pose upside risks to food inflation. We see some risk of renewed tightening in Q4 CY23 if food price pressures become more broad-based and/or spill over into core services inflation, and push out our rate easing forecast for 2024; we now forecast two repo rate cuts in CY24, 25bp each in Q2 and Q3 CY24 (vs. Q1 and Q2 earlier)."

SocGen: "Apart from the decision to impose incremental CRR of 10%, RBI’s view matches with ours. RBI rightly talked of data dependency given the still lingering uncertainty about inflation trajectory, with the possibility of a rate hike still at play in the event inflation remains elevated for longer. Yet that possibility does not appear to be RBI’s base case scenario and neither does it in ours. If no further worsening of inflation trajectory materialise, we would expect the central bank to make its first rate cut announcement during 2Q24."

ING: We expect Indian inflation to peak in August at over 8.5%YoY before drifting back down through the end of the year. And while this is unlikely to require any offsetting rate action from the RBI, it may make it harder for them to begin easing rates as soon as we had previously thought. That now looks more likely to be a story for 2024.