Watching Pass Through From Higher Food Prices, Possible OMO Sales Weigh on Local Bonds

As widely expected by the consensus, the RBI left policy rates unchanged at the October policy meeting. The decision to keep the policy rate at 6.50% was unanimous, while 5 out 6 board members also agreed to maintain the policy bias as 'withdrawal of accommodation', which was also in line with the consensus.

• Elevated inflation remains the major risk in terms of the broader macro outlook. The central bank stands ready to address any shocks and will act as necessary. September inflation is expected to ease, but uncertainty remains around the food price outlook.
• Governor Das noted sustained food price gains could lead to broader inflation pressures. Still, the central bank kept it current financial year inflation forecast unchanged at 5.4%.
• Das spoke quite positively in terms of the growth backdrop, particularly in terms of capex. This was evident in terms of detail in Q2 GDP growth report. The current financial year GDP forecast was unchanged at 6.5%.
• There was some focus on liquidity. Das noted that excess liquidity can pose a risk to financial market stability and price stability as well. Das stated the central bank may consider OMO (open market operation) bond sales in the future to manage system liquidity.
• This latter point has seen local bond yields rise, the 10yr up +7bps to 7.29%. USD/INR is down slightly, last near 82.20.