What Goldman Sachs say

Domestic bank credit growth remains anaemic at 10.8% yoy as of October 9, there are a few lingering doubts about the sustainability of the recovery in economic activity especially due to the drought, and various Ministry of Finance officials have indicated that they would like the accommodative stance to continue for some time.

The challenge for the RBI going forward is the timing, magnitude, and the implementation of an exit strategy from the current extremely accommodative stance. In our view, this would entail allowing INR appreciation to stem imported inflationary pressures, policy rate hikes, and liquidity withdrawal, in that order.

We expect the first rate hikes to begin in January 2010. The RBI, we think, will issue a relatively hawkish statement, highlighting upside risks to inflation, and a possible upward revision to its inflation target of 5% for end-March 2010. We expect a cumulative increase in policy rates of 300 bp in 2010.

'RBI likely to retain policy rates, may hike CRR'

Hence, we recommend positioning for 2s-5s IRS flatteners. With the RBI more tolerant towards currency appreciation, we believe the INR will continue to strengthen against the USD. Our 3, 6 and 12-month USD/INR targets are at 44, 43.4, and 43 respectively.

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All about: Goldman Sachs, RBI, Policy, Economy, Topnews

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