The expectation was balanced between rate pause and 25 bps rate hike, and MPC preference went in favour of rate hike, to have better grip on sticky inflation and to arrest INR weakness beyond 69.
RBI is seen to have weighed on external cues largely from Brent Crude resilience at lower end of $70-80, USD strength while DXY at lower end of 94.15-95.65, sudden spike in US 10Y Treasury yield from 2.80-2.85% to 2.95-3.0% and declining FPI flows from yield spread squeeze, making INR exchange rate not attractive to hold & accumulate India risk assets.
The way forward comfort for the stakeholders is from optimism on GDP growth, pegging it around 7.5% and not lifting the CPI risk beyond 5% despite impact from MSP & other domestic factors in play, while deriving output comfort from good monsoon across India.
All combined, optimism on macroeconomic fundamentals is retained, taking comfort from diluted headwinds from external sector, which ensured post policy price stability across asset classes, making it a kind of non-event.
NIFTY index is expected to be in consolidation mode at 11150-11500, Bank Nifty at 27000-28000, 10Y Bond 7.17% 2028 yield at 7.65-7.85% and USD/INR at 67.70-69.10. It is “all is well” post policy trade set up with confidence that the worst is behind, and expectation of extended rate pause through rest of 2018 & FY19.