Mixed views of RBI policymakers
The Reserve Bank of India’s Monetary Policy Committee meets on December 6. We share the solid analyst consensus forecast of no change to the policy. And just as the consensus, we aren’t expecting the RBI to alter the neutral stance any time soon, until after 2018.
A deeper rate cut or a hike
Based on the MPC minutes of the October 4 meeting the consensus within the six-member MPC on the policy course appears fractured at the moment. One assessed a significant slack in the economy as warranting a deeper rate cut while another recommended a readiness for tightening to tame underlying inflation drivers. The remaining members favoured the status quo, including Governor Urjit Patel who noted medium-term risks to the inflation outlook and uncertainties on the external and fiscal sides.
Anything changed since last policy?
Nothing apart from some good news of more fiscal stimulus from the bank recapitalisation and infrastructure development plans to be implemented over the medium-to-long term. The long-term nature of the plan, however, implies limited scope for any immediate boost. GDP growth improved in the second quarter of fiscal year 2017/18 but the key growth driver - private consumption - was missing. CPI inflation continued to grind higher and is likely to have reached the RBI’s 4% policy target in November on rising food prices (data due on 12 December).
Policy target for CPI inflation
Inflation nearing RBI's policy target
Forecast USD/INR trading range for 2018
Lack of clear direction for markets
We expect the RBI to tread a cautious path on inflation as global oil prices edge higher. The weak Indian rupee (INR) and fiscal slippages complicate policy making. USD/INR and Indian government bond yields have clawed back half of the spike at the height of increased policy jitters in September. We think markets need clear direction on both monetary and fiscal policy before they replicate the strong performance of the first eight months of this year. With the loose consensus within the RBI MPC and with fiscal uncertainties from recent tax reforms such clarity is unlikely in the near-term. We forecast a 64.0–66.0 USD/INR trading range for 2018 (spot: 64.4).