As expected, the RBI left the interest rate unchanged at a seven-year low at 6.00%, influenced by the recent acceleration in inflation which the RBI has raised its forecast to 4.2% – 4.6%. Meanwhile, the RBI has trimmed the FY2018 GDP growth forecast to 6.7%, down by 0.6% due to the impact from GST on the manufacturing sector (our FY2018 GDP projection is now at 6.5% from 7.0% previously).

While some are expecting further policy loosening, we expect rates to stay at current levels as core inflation is picking up. If the domestic growth-inflation dynamics continues to surprise on the downside, the RBI could cut an additional 25-50 basis points in the next six months. Our base case currently is for status quo to remain for rest of FY2018.

We expect the rupee, which opened at 65.453 against the USD and reaching 65.485, to hover around 65.741 in the near term while on the stronger end, it would be around 64.806. Against the Malaysian ringgit (MYR), the rupee, which opened at 15.437 and reaching 15.48, should hover around 15.4914 while on the stronger note, it would be around 15.3462.

• As widely expected, the RBI kept the interest rate unchanged at a seven-year low at 6.00%. The decision to retain rates was driven by the recent acceleration in inflation. The RBI trimmed its FY2018 (fiscal year ending March 2018) growth forecast to 6.7%, down by 0.6% due to the impact from GST on the manufacturing sector that will slow down the investment revival. We have lowered our FY2018 GDP projection from 7.0% to 6.5%.

• Meanwhile, the RBI cautioned on inflation, raising its forecast to 4.2% – 4.6% from 4.0% – 4.5% previously. Inflationary pressure is expected to come from: (1) the implementation of farm loan waivers by states; (2) GST effect; (3) uneven rainfall distribution of monsoon; and (4) firm crude oil prices.

• Some are still expecting further, albeit modest, policy loosening. However, with core price pressures building, we expect rates to stay on a prolonged hold. We will watch closely the domestic growth-inflation dynamics. If growth and inflation continue to surprise on the downside, the RBI could cut an additional 25-50 basis points in the next six months. Our base case currently is for status quo to remain for rest of FY2018.

• On that note, we expect the rupee, which opened at 65.453 against the USD, and reaching 65.485, to hover around 65.741 in the near term while on the stronger end, it would be around 64.806. Against the Malaysian ringgit (MYR), the rupee, which opened at 15.437 and reaching 15.48, should hover around 15.4914 while on the stronger note, it would be around 15.3462.

Source: AmInvest Research - 5 Oct 2017