Brokerages See An Extended Rate Pause From RBI

Brokerages unanimously agree that there will be no interest rate change from the Reserve Bank of India for the rest of the current financial year.

Benchmark Indian equity indices extended losses after the policy announcement yesterday, with Nifty 50 index ending 0.73 percent lower at its lowest level in nearly two months.

Indian bonds ended with gains, while yield on the benchmark 10-year paper fell three basis points to end at 7.03 percent. In the currency market, the rupee ended 13 paise weaker to the U.S. dollar.

While most of the brokerages are clear about the RBI extended pause during FY18, they await more data to understand the central bank’s stance strategy in FY19.

Here are the key takeaways from their post-policy notes:

Motilal Oswal

• Expect inflation to rise towards 5 percent by March 2018, primarily on account of low base.
• On the other hand, expect real GVA to rise slower than the RBI’s expectations.
• No rate action expected in remaining part of 2017-18.

CLSA

• India’s credit growth remains massively below what would support a cyclical upswing and inflation is still below the centre of the inflation target “any discounting of higher rates represents an incorrect belief that the world is now on a correlated tightening cycle”.
• Discussion of a cut has more merit given the weakness of growth.
• CPI inflation will rise a little further which implies no change in monetary policy in 2018 either.

Macquarie

• Read the policy statement as neutral.
• Expect the RBI to be on an extended pause with inflation risks contained and growth in a gradual recovery mode.
• With ongoing liquidity tightness to persist into the year-end, expect market rates to remain under pressure which could potentially hurt financial stocks, particularly non-banking financial companies, which have been a beneficiary of benign liquidity conditions.
• A rate hike in FY19 will be premature on expectations of a gradual growth recovery and inflation risks remaining contained.

Nomura

• Believe both growth and inflation are headed higher.
• Expect rates to be on hold through 2018 as the RBI has a sufficient real rate cushion to absorb higher inflation.
• Forex strategy: remain constructive on rupee, due in part to a credible monetary policy, recovering growth and still-strong balance of payments position with large forex reserves.
• Rates strategy: do not expect any further open market operation sales and expect banking system liquidity to reach neutral conditions by fiscal year-end; expect bond markets to consolidate around current levels.

Kotak Securities

• The tone of the communique was broadly neutral even as it adequately highlighted the upside risks to inflation.
• Maintain call that the RBI monetary policy committee will likely remain on a pause for the rest of FY18 as inflation continues to inch higher.
• Believe that the focus will start shifting to MPC’s possible moves in FY19 with the rate-cut cycle broadly over, for now.