RBI policy expectations - 50bps hike

RBI last CPI projection for end FY19 was 4.8% and the last core CPI reading was 5.9% for the month of Aug 2018. Now with Rupee and Crude under pressure the case for CPI to edge higher than 5% by FY19 end and core inflation to remain or rise even higher becomes stronger. This perhaps gives RBI inflationary arguments to hike by 25-50 bps today, although the real reason would be to increase real rates further in this environment to prevent a currency stress.

A hike of 50 bps should result in temporary and moderate (30p) Rupee appreciation while a hike of 25bps might result in 73.80 being seen again. A no hike would result in 74 levels. I expect a 50 bps hike given that currency has been an area of concern for the RBI / government and raising rates in the current context is the minimum RBI could do.

Other measures like NRI bonds are unlikely to be announced immediately and the RBI will take time (and higher USDINR levels)  to reverse its aversion to oil window. Increasing rates, depreciating rupee and higher crude should result in lower growth forecast which should negatively impact equities and government bonds. Therefore the hike would not sustainably  alter the higher trajectory for USDINR.