India RBI: Stuck Between A Rock And A Hard Place – TDS

Analysts at TD Securities (TDS) expect the Reserve Bank of India (RBI) to keep policy on hold at its upcoming meeting on Thursday but maintain an accommodative stance.

Key Quotes:

“The sharp rise in inflation over recent months has effectively ruled out a rate cut at this meeting; the 7.35% y/y CPI reading in December, well above the RBI's 2-6% target was due in large part to a surge in vegetables and pulses. RBI expects this to be transitory, but may want to wait to see concrete signs that prices will drop before easing again. We think the RBI is likely to cut next at its April meeting.”

“RBI will be somewhat encouraged by core and core-core CPI (ex-food, all fuels, gold and silver) which remain well contained. Indeed, core-core CPI fell to a multi-year low in December 2019. We think headline inflation will ease in the months ahead and expect food price gains to dissipate towards the end of Q1 2020, opening up scope to resume easing.”

“We look for relative INR outperformance in the short term given 1) India's limited (so far) exposure to the nCov 2019 and 2) the sharp drop in oil prices. Further out, we expect INR to play a role in supporting activity amid a worsening in exports performance. We expect the RBI to continue to stand in the way of further real INR appreciation and to favour FX weakness as a means to stimulate exports and the economy, especially as the pass through to inflation is relatively low.”