India: Expect the RBI to follow up with more moderate tightening ahead – TDS

Mitul Kotecha, Head of Emerging Markets Strategy at TD Securities (TDS), provides his afterthoughts on the Reserve Bank of India (RBI) policy decision, announced earlier this Friday. The Indian central bank raised its policy repo rate by 50bps to 5.40% in a unanimous decision.

Key Quotes:

“The RBI also maintained its stance to "remain focused on withdrawal of accommodation". We expect the RBI to follow up with more moderate tightening ahead; next hike likely at its meeting at the end of September. We maintain our terminal rate expectation of 6.0% by Q1 2023.”

“There was no revision to the RBI's fiscal year inflation forecast of 6.7% (TD 7.0%) though we see upside risks to this forecast. We concur with the view that CPI will remain above the target range (2-6%) for a few more months, but to drop below the band into next year. RBI maintained its growth forecast of 7.2% for FY 23 (TD 7.5%).”

“Like other Asian currencies INR has benefitted from the recent drop in the USD. Having pulled back from a breach of USDINR 80.0, we continue to expect some consolidation in the near term. We expect IGB yields to drift lower as the RBI shifts to less aggressive tightening in the months ahead though foreign investors continue to remain shy of Indian bonds.”