Thursday, 2 August 2018

RBI policy watch: The long and winding price road

Abheek Barua
RBI's policy decision suggests that it seems to be taking a long-term view on inflation rather than remaining purely data dependent. The discussion on the possible increase in inflation early next year (Estimate of Q1 2019-20 to 5%) as well the assertion that policy rate changes impact the real economy with a lag (with a shorter lag in transmitting to lending rates) corroborates this.
Also, RBI’s statements on increasing external risks and discussions on currency contagion (currency war) in the press conference, confirms our belief that the RBI is not in favour of excess depreciation and seems to want to hold on to a certain exchange rate level. A rate hike is a textbook method of defending a currency.
 
Given the upside risks to inflation, discussed extensively, another policy rate hike cannot be ruled out. However, if there is an escalation in trade war risks and a resultant global output compression, then the RBI could be prompted to stay on a prolonged pause.
 
The RBI committed that liquidity conditions would be maintained close to the neutral level. This means the supply side pressures in the second half of this year could be offset by OMOs but it is unlikely that we will have any liquidity surplus. We expect OMO purchases to the tune of Rs800bn in 2018-19, including Rs300bn done so far.
 FUTURE NIFTY CALL: BUY NIFTY ABOVE 11300 TARGETS 11330 / 11360 / 11399 STOPLOSS 11260 

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