Policy will remain loose for a long time to come

We agree with financial markets and the consensus that India’s policy rates will be left unchanged at the conclusion of the MPC meeting on Friday. Further ahead however, we think that markets are wrong to expect rate hikes within the next 12-18 months, despite the growing likelihood of a rollout of an effective vaccine by then. In fact, on balance, the RBI is more likely to loosen policy a little further over the coming months as the COVID-19 restrictions that have pushed up core inflation get scaled back.