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RBI likely to hold rates on October 4 policy: Morgan Stanley

Taken together, it will mostly translate into an MPC vote of 5-1 to keep rates on hold while maintaining a neutral stance

Morgan Stanley  |  New Delhi 

RBI, reserve bank of India
RBI

With the weak growth in the Jun-17 quarter, the debate on providing stimulus to the economy reemerged. However, the prospects of a rate cut had been dampened by the August CPI print of 3.4%, which surprised on the upside.
 
Indeed, with expected to rise closer toward the RBI's target, we do not think there is much room to ease monetary policy further. Moreover, the potential fiscal easing would have to be evaluated in the context of its impact on

 
As private capex remains relatively subdued, it has been suggested that further easing (in the form of lower rates) will help boost growth. However, in this regard, the has taken the view that actions to resolve the banking system's non-performing loans will be key to fostering the recovery in capex and credit demand areas as opposed to further rate cuts. This was most recently emphasized by the governor in the last minutes, where he noted that "Resolution of stressed balance sheets of banks, therefore, will remain important for reviving credit demand and the investment cycle."
 
Taken together, we think this translates into an vote of 5-1 to keep rates on hold while maintaining a neutral stance (Dr. Dholakia will likely continue to press the case for further easing).
 
INR rates and FX have underperformed on media reports of potential fiscal stimulus. While we await more details on fiscal policy, assuming that increases in fiscal spending would likely be small and targeted, we think India's macro fundamentals of high real rates, increased financial savings and structurally lower will remain supportive of rates.
 
IGB valuations are not rich relative to these fundamentals, while 5y NDOIS looks cheap relative to monetary policy expectations. We look to add long IGB 5y on upticks toward 6.75%, preferring to stay in lower-duration bonds, given the evolving fiscal outlook. Should the show concern on the slowing growth and negative output gap, we would look to receive 5y NDOIS.
 
On INR FX, we think fundamentals of a positive BoP remain supportive for INR, while INR REER over-valuation has moderated following moves over the past week. Technical momentum for USDINR upside should start to look stretched toward 67.0 levels.
 
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The above note has been excerpted from a report.

First Published: Fri, September 29 2017. 11:18 IST
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