HDFC Bank: Statement of Abheek Barua, Chief Economist, HDFC Bank on the RBI Policy announced today

image-HDFC Bank Statement of Abheek Barua on the RBI Policy announced MediabriefThe pause in the rate cycle comes as a surprise given the dismal growth for the second quarter of 2019-20 and the likely persistence of a slowdown. Clearly the RBI has responded to hardening headline inflation and rising inflation expectations of households. This suggests two things.

Abheek Barua, Chief Economist, HDFC BankAny sustained increase in headline CPI inflation (whether or not it is primarily driven by supply shortages that the RBI itself acknowledges as transitory) above the median of the target range of 2 to 6 percent will cause make the MPC anxious and translate into a pause. It also seems that the RBI wishes to see the lagged impact of its front-loaded 135 basis point cut in the policy rate along with some of the slew of fiscal measures plays out for future growth. We expect some tightening in bond yields in response to this surprise. Given the paucity of loan demand, banks are likely to chase assets and the transmission process could gain traction. However, the flight to safety and large risk premiums for risky borrowers will persist.

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