RBI gratifies the market


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

  1. Repo Rate reduced by 25bps to 6.00%.
  2. The "neutral" stance remains unchanged.

Consequently, reverse repo stands adjusted to 5.75% and the marginal standing facility (MSF) rate and Bank rate to 6.25%.

Out of the 6 MPC members, 4 voted for a 25bps repo rate cut, 1 voted for a 50bps repo rate cut and 1 voted for no change. Growth (7.3% Gross Value Added) and inflation (2-3.5% for H1 and 3.5 – 4.5% CPI for H2) forecasts for FY18 have mostly been maintained, with minor downward revision to Q4 CPI forecast.

Additionally, RBI announced the following macro-prudential measures for strengthening the banking regulatory framework.

  • RBI acknowledged that the marginal cost of funds based lending and borrowing (MCLR) system, even though an improvement over the Base Rate system has not been entirely satisfactory and RBI will take further measures to improve the Monetary Policy transmission.
  • Other measures include changes to Liquidity Coverage Ratio(LCR) guidelines, setting up of a task force on Public Credit Registry (PCR) in India, introduction of Tri-party repos, simplification of hedging facilities along with a proposal to allocate a separate limit of INR 5000 crore to FPIs for long position in interest rate futures (IRF).

10 yr G-Sec movement around the last 4 RBI Policy announcements

Source: Bloomberg

Assessment & Outlook

Even though the growth forecasts remain unchanged, there appears to be an urgency to revive private investment in the August policy. This was fairly low in the priority list during the June policy announcement. The RBI also seems concerned about quickly addressing the twin balance sheet problem (of borrower companies & banks) which is hindering proper monetary policy transmission. RBI has not closed the option for further rate cuts as in the press conference, the Deputy Governor mentioned that after today’s move real policy rates might be marginally higher than the range (125-175bps) earlier suggested by the RBI.

However, Citi economists believe that the RBI will not be in any hurry to cut rates soon as they would like to track the upward move in the consumer price inflation (CPI) over the next few months. They believe that the July CPI could itself be ~2% (June 1.5%) and there are quite a few event risks (tomato prices up, onion could be next, HRA increase of state governments, post GST price movements) which could materially affect CPI forecasts. They maintain their view of another 25bps cut in Q4, once we have more visibility around meeting the 4% CPI target in a sustained manner.



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