E
CO
S
COPE
Expect no more rate hikes in 2018
RBI’s economic projections broadly unchanged
1 August 2018
The Economy Observer
As per our expectations, the monetary policy committee (MPC) hiked policy rates by 25bp in its monetary policy
meeting held today. The decision to hike rates was taken with 5-1 majority – Dr R Dholakia disapproved.
Notwithstanding the government’s decision to fix minimum support prices (MSPs) for all kharif crops at at-least 150% of
the cost of production, the RBI has kept its FY19 inflation forecasts broadly unchanged. Real GDP growth forecasts are
also retained at 7.4% for FY19.
Although the RBI highlighted multiple risks to inflation and growth, the risks to both forecasts are evenly balanced.
We believe that both inflation and real GDP growth in FY19 will be lower than the RBI’s forecasts. Further, as we move
closer to the elections, the uncertainty will also increase. We don’t expect further rate hikes in the remainder of FY19.
Unlike in June, however,
the decision to hike rates
was not taken unanimously
we don’t expect RBI to hike
rates further in FY19
RBI hikes policy rates again by 25bp…:
In its third bi-monthly policy meeting for
FY19, the MPC hiked policy rates by 25bp again, taking the repo rate to 6.5%,
the reverse repo rate to 6.25% and the marginal standing facility (MSF) rate to
6.75%
(Exhibit 1).
The move was in line with our expectations and market
consensus as well. Unlike in June, however, the decision to hike rates was not
taken unanimously. The decision was taken with a majority of 5-1, as
Dr Ravindra H Dholakia voted against the decision. Despite two back-to-back
rate hikes, the MPC continued to maintain a ‘neutral’ policy stance.
…while keeping economic projections broadly unchanged:
Although RBI
mentioned higher hike in MSPs would have a direct impact on food inflation, it
clarified that it is a challenging task to incorporate it into inflation forecasts due
to the uncertainty related to the nature and scale of the government’s
operations. Consequently, inflation is projected at 4.6% in 2QFY19, 4.8% in
2HFY19 and 5% in 1QFY20. It implies that inflation forecast remains broadly
unchanged at ~4.8% for FY19
(Exhibit 3).
The central bank has also retained its
GDP growth forecast at 7.4% for FY19 (7.5-7.6% in 1H and 7.3-7.4% in 2H). The
RBI also believes that the risks are evenly balanced to both forecasts
(Exhibit 4).
We, however, expect inflation and growth to be lower than RBI’s forecasts…:
Our calculations, however, suggest that both inflation and real GDP growth
would be lower than RBI’s projections in FY19. We believe that inflation will be
~4.4% in 2QFY19 and ~4.2% in 2HFY19, implying full-year inflation of ~4.5% in
FY19. Further, while real GDP could give a positive surprise by clocking higher
than 7.5% growth in 1QFY19, it is expected to decelerate significantly in 2HFY19.
Overall, we assume that real GDP growth is likely to remain sub-7% for the
second consecutive year in FY19.
…and thus, don’t expect further rate hikes:
With lower-than-expected inflation
and lower-than-expected growth, we don’t expect RBI to hike rates further in
FY19. As we move closer to the general elections, higher uncertainty also
indicates a prolonged pause in terms of interest rates.
Nikhil Gupta
– Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Rahul Agrawal
– Research analyst
(Rahul.Agrawal@motilaloswal.com); +91 22 3982 5445
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Exhibit 1: RBI hikes policy rates by 2bp again…
8
7
6
5
Repo
Reverse repo
MSF
Exhibit 2: …as liquidity hovers around neutrality
3
(% of NDTL)
2
1
0
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Aug-16 Dec-16
Liquidity deficit
Apr-17
Aug-17
Dec-17
Apr-18
Aug-18
Source: RBI
Source: RBI
Exhibit 3: RBI keeps inflation forecasts broadly unchanged…
Exhibit 4: …and also retains FY19 GDP growth projections
Source: RBI
Source: RBI
1 August 2018
2

NOTES
1 August 2018
3

Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
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< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
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1 August 2018
4