India Insight:MPC keeps rates on hold,trims growth

Repo rate kept unchanged vs our and market expectation of a 25bp cut:

All six members of the MPC (Monetary Policy Committee) voted to keep therepo rate (the rate at which the RBI injects liquidity) unchanged at 6.25% inthe policy review today. Accordingly, the reverse repo and marginal standingfacility (MSF) rate stand adjusted at 5.75% and 6.75%, respectively. Theminutes of the MPC’s meeting will be published on 21December and willrecord the views of each member.

Scope of further policy easing remains, let the dust settle: We continue toexpect inflationary pressures to remain contained (~4.5% CPI inflationestimated in FY18) and see scope for a further 50–75bp cut in the repo rateover the next 12months. In the press release, the MPC clearly mentioned thatthis bi-monthly review is set against the backdrop of heightened uncertaintydetermined by (a) global factors, including the imminent tightening ofmonetary policy in the US and its spill-over impact on EMEs, volatility in crudeprices, etc, and (b) domestic factors, including supply disruptions in thebackwash of currency replacement. We think the MPC is in the wait-andwatchmode and will monitor how these developments pan out over thecoming months, especially the transitory and unclear effects of the withdrawalof specified bank notes (SBNs), when deciding the monetary policy stance.