Economy: MPC minutes: Emerging growth concerns - Kotak

MPC minutes: Emerging growth concerns. The August 1-2 policy meeting minutes were overall mildly dovish with almost all members acknowledging the recent fall in inflation and its core components and fading immediate upside risks. Importantly, most members seemed concerned about the weaker potential growth prospects owing to debt overhang of companies and banks and other infrastructure bottlenecks. However, on this front, Dr Viral Acharya maintained that there is not much further rate cuts can do to address the symptoms of twin balance-sheet problems and instead this could even backfire by misallocating investments and fuelling asset price inflation. The two significantly contrasting inflation views were evident in the August minutes as well. Dr Dholakia argued for 50 bps cut as he expects CPI inflation (ex-HRA) to undershoot RBI's end-March 2018 forecast of ~4%+ by about 50 bps. On the other hand, Dr Patra argued for no rate cut stating that in a forward-looking inflation targeting regime, a rate cut will undermine credibility when inflation is set to rise in a couple of months.

We expect headline CPI inflation to inch higher due to adverse base effect, mean reversion of food prices and as 7CPC HRA impact begins to seep in, pushing the headline inflation towards 4.6% by March 2018 (4.3% ex-HRA). Nonetheless, core inflation is expected to remain tepid, averaging 4.2% compared to 4.7% in FY2017, underscoring the weak underlying demand pressures. With RBI's downward revised trajectory now mostly in sync with our estimated inflation trajectory, we reiterate our call that the RBI will pause for the rest of FY2018. However, we remain watchful of the incoming data and reckon that room for any further cut can open up again if inflation surprises below the 4% mark on the back of (1) improvement in food supplies amid a good monsoon, (2) imported disinflation due to INR appreciation and (3) downward surprise of core inflation owing to weaker-than-expected growth.

Source : Equity Bulls

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