Growth recovering, inflation sticky in India, Morgan Stanley believes a cycle has ended

The MPC kept rates unchanged at 4%. Morgan Stanley believes that the easing cycle has ended as growth is recovering and inflation is sticky. Further, Morgan Stanley expects RBI will have to think about bringing the call rate closer to the repo rate as growth recovery provides confidence.

MPC kept rates unchanged and maintains an accommodative stance:

The MPC, unanimously, kept policy rates unchanged, for the third time in a row, in line with consensus expectations. It continues to maintain an accommodative stance, going into the next financial year, to aid sustainable revival of growth from pandemic disruptions. Additionally, The RBI announced liquidity and regulatory measures.

RBI expects output to contract at a slower pace and inflation to remain elevated:

The RBI revised its growth forecast upward to a contraction of 7.5%YoY from -9.5%YoY in F2021, as it now expects growth to turn positive in 2HF2021. On the inflation front, the outlook turned adverse as core inflation remains sticky due to cost push factors. RBI expects inflation to remain above the upper threshold of the MPC's target at 6.8% in Q3F2021 then decelerate to 5.8% in Q4F2021, with risks broadly balanced.

Policy guidance still remains accommodative to support growth:

The MPC maintained status quo on rates and continued to maintain its accommodative stance to aid growth while keeping inflation within its 2-6% target. Additionally, the Governor stated that the RBI will keep liquidity conditions adequate using the measures at the RBI's disposal. The policy statement highlighted, "The MPC is of the view that inflation is likely to remain elevated, barring transient relief in the winter months from prices of perishables. This constrains monetary policy at the current juncture from using the space available to act in support of growth. At the same time, the signs of recovery are far from being broad-based and are dependent on sustained policy support."

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Expect rates to be on hold and that the RBI will eventually take the call rate closer to the repo rate as growth continues to recover:

As Morgan Stanley has opined earlier, Morgan Stanley expects rates to remain on hold until Q3 21 against a sticky inflation trend and continued sustained recovery in growth. Morgan Stanley believes that as growth recovers in 2021, the neutral policy rate will have also risen and the RBI will have to think about taking the effective policy rate (i.e., the weighted average call rate) closer to the repo rate.