The RBI successfully delivered a hawkish pause in todays’ policy announcement keeping the policy rate unchanged at 6.5% while keeping the door open for further rate action. The central bank kept its stance unchanged at “withdrawal of accommodation”, justifying it by still looming inflationary risks. Growth was surprisingly revised upwards to 6.5% for FY24 while inflation forecast for Q4 FY24 was revised down – most likely on account of base effects. We expect that growth could be lower at 6% this fiscal while there are upside risks to the RBI’s inflation forecast, especially given the impending risks around oil prices and the performance of monsoons.
Going forward, the RBI could go for “the higher for longer” narrative – staying on an extended pause in FY24 while tightening liquidity conditions. Therefore, short-term rates could remain under pressure over the coming months. For the 10-year yield we could see some pressure return once the governments’ borrowing program kicks in and a range of 7.20-7.30% is likely in the first quarter.
