India: RBI policy meeting to mark a turning point in the interest rate cycle - Nomura

Analysts at Nomura expect the Reserve Bank of India’s (RBI) policy meeting of today to mark a turning point in the interest rate cycle as a higher-than-expected core inflation, a strengthening economic recovery, upside risks to inflation from higher oil prices, a weaker currency and higher minimum support prices all point to a hawkish outcome.

Key Quotes

“We expect the repo rate to be left unchanged, but the policy stance to change from ‘neutral’ to a ‘withdrawal of accommodation’, setting the stage for a cumulative 50bp of hikes in H2 2018. However, this is a close call and we assign a 40% probability to a 25bp hike in June itself. The RBI is likely to retain its optimistic growth projection of 7.5% y-o-y for FY19 (vs. 6.7% in FY18), in our view, but we expect it to highlight upside risks to its CPI inflation projection of 4.4% in H2 FY19, given higher oil prices.”

“On the external front, we expect the current account deficit to widen to 2.3% of GDP in Q1 from 2.1% in Q4 2017. The deterioration is likely driven by an increased trade deficit, with a pick-up in merchandise imports due to rising oil prices amid lacklustre exports. However, net capital inflows likely remained healthy in Q1, fully financing the current account deficit with an overall balance of payment surplus of USD9bn.”