"The status quo on policy rates by RBI was in line with consensus expectations. MPC has revised down the growth projections sharply to 6.7% from 7.3% for current year and also revised H2 inflation projection marginally to 4.20-4.6% from 4-4.5%. MPC has maintained the neutral stance and will be data dependent for rate changes in future.
The policy statements is in contrast to the streets and our expectation of dovish guidance amid lower growth, as even after cutting growth projections sharply by 60bps, MPC sees upside risk to inflation partly due to higher crude prices and fiscal slippage if materializes. MPC asserted that they acknowledge the widening output gap especially after Q1 growth prints but will wait for emergence of clearer picture. On growth front, MPC believes recapitalizing banks, restarting stalled investment projects and faster roll out of affordable housing scheme will help close the output gap.
With a lower inflation and growth outcomes expectations were of a dovish stance to support growth, however MPC has chosen to wait more to decipher the transient and structural factor behind lower GDP growth and direction of crude oil prices in near term. We believe MPC to be more data dependent and hence have maintained the neutral stance. We see a possibility of 25bp reduction in interest rates if inflation remains below 4% in coming quarters.
Bond market will take the policy negatively in near term and trade in the range of 6.50-6.75%".