The fluidity of global narratives and policy repricing, in conjunction with surplus banking liquidity, noisy food inflation back home, and a still-elusive 4% inflation target, make it tricky for the RBI to find a balance in its policy biases, said Emkay Global ahead of the RBI MPC meet.
It further said that while the upcoming policy may not see any rate action, issues like case and timing of policy pivot/stance change, and factors influencing liquidity management ahead would be key for markets.
“We expect softness in the policy tone, recognizing emanating macro forces and market risks,” it said.
While curve steepening looks to be a popular trade, consistent repricing of Fed cuts and further unwinding of the Yen carry trade could spill over into the RBI’s reaction function and will be cyclically noisy for bonds/FX, in our view.
Food inflation remains sore point for the RBI
In its India Equity Research report, the Emkay Global said while the MPC has been wary of spillover risks emanating from higher food prices, we do not see core inflation moving above 4% till end-CY24 and averaging at sub-3.75% in FY25.
We maintain that growth is sub-par in India and do not subscribe to the RBI’s estimate of FY25 growth at 7.2%.
Persistently elevated food inflation, with sporadic volatility in vegetables and continued supply tightness in pulses, averaging at 8% in the past 12 months, is preventing durable disinflation from taking hold.
No sense for RBI to deviate much from global winds
In June meet, two MPC members argued in favor of cuts, led by their perception of weakening growth signs, higher sacrifice ratios, and higher-than-required real rates.
This argument will gain further traction among neutral members amid spillover of a global growth scare. To be fair, the volatility in India FX and rates has been manageable amid the recent market turmoil, Emkay said.
Staying relatively hawkish and highlighting the stillelusive durable 4% inflation target will only create unwanted INR carry, at a time when the RBI is still saddled with managing the problem of plenty, especially in H1FY25.
Thus, it would be pointless to add more to the bounty. A possible change in stance (albeit still contradictory) is a small possibility, to lend a dovish bent and create space for cuts ahead. As such, we do not see it being a necessity, it added.
