RBI POLICY – ENSNARED BY INFLATION & GROWTH CONUNDRUM

BY GAURAV KULSHRESHTHA | 06 DECEMBER, 2017

The Fifth Bi-Monthly Monetary Policy Statement for FY 2017-2018 was released by RBI today. Following were the highlights.

  1. Repo Rate left unchanged at 6.00%.
  2. The "neutral" stance continues.

Consequently, reverse repo rate remains unchanged at 5.75% and the marginal standing facility (MSF) rate and Bank rate also remains unchanged at 6.25%.

Out of the 6 MPC (Monetary Policy Committee) members, 5 voted in favour of the monetary policy decision, while 1 voted for a 25bps repo rate cut. The decision of the MPC is consistent with the ongoing “Neutral” stance. RBI retained its projections of real GVA (Gross Value Added) for 2017-18 @6.7%. Inflation forecast has been marginally revised upwards and RBI now expects inflation to rise from its current level and range between 4.3-4.7% in the second half of 2017-18.

Some of the other developmental measures that were announced by RBI were:

  • Rationalization of the Merchant Discount Rate framework, to provide fillip to acceptance of debit card payments.
  • Allowing overseas branches/subsidiaries of Indian banks to refinance ECBs of AAA rated corporates as well as Navratna/Maharatna PSUs.

10 yr G-Sec movement around the last 6 RBI Policy announcements

Source: Bloomberg

Assessment & Outlook

MPC’s decision to leave the repo rate unchanged at 6% and also retain the “Neutral” stance was in line with consensus expectation. However, the MPC statement struck a cautious tone around inflation, and revised the CPI forecast marginally higher to 4.3–4.7% from 4.2–4.6% earlier. The MPC notes that the evolving trajectory needs to be carefully monitored and remains committed to keeping headline inflation close to 4 per cent on a durable basis.

On the growth side, despite the recent lower growth prints for 1Q & 2Q FY18, RBI has retained its full year FY18 GVA (Gross Value Added) growth estimate at 6.7% with growth forecasted to improve to 7% in 3Q and 7.8% in 4Q. Citi economists believe that RBI’s growth assumptions appear a tad optimistic (Citi economists estimate GVA to grow at 6.3% for FY18) and actual growth momentum may surprise on the downside. They believe that this conundrum will likely keep the monetary policy on a long pause, even though the risks of an interest rate hike in 2018 has increased at the margin.

Citi economists believe that any downward movement in yields/rates in the near term, post the policy announcement is likely to be shallow, given the shifting underlying fundamentals. Investors may continue to avoid any fresh long duration exposure and remain diversified in their fixed income portfolios.


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