RBI Policy – rates on hold


The Sixth 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 hike in repo rate. The decision of the MPC is consistent with the ongoing “Neutral” stance. GVA (Gross Value Added) growth for 2017-18 is projected at 6.6%, down from previous estimate of 6.7%, due mainly to slowdown in agriculture and allied activities, mining and quarrying, manufacturing, and public administration and defense services. GVA growth for 2018-19 is now projected at 7.2% down from 7.4% earlier. RBI expects inflation to average 5.1% for the period Jan’18- March’18 and for 2018-19, CPI is estimated in the range of 5.1-5.6% in H1 and 4.5-4.6% in H2, with some upside risks. Inflation in H2 is expected to be lower, provided there is a normal monsoon and effective management of supply side factors by the Government.

10 yr G-Sec movement around the last 7 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. Further, The MPC revised their inflation forecast upwards while lowering their growth forecast, possibly increasing the inflation-growth conundrum and posing challenges for monetary policy decisions going forward.

Citi economists note that there seems to be a slight dovish undertone owing to the following:

  1. RBI seems tolerant of the slightly elevated inflation projections and prepared to symmetrically use the band around the 4% target.
  2. The RBIs already elevated inflation projection needs to breached by the actual or expected inflation, for any rate hike to come through.
  3. An explicit reference to “nascent recovery needs to be carefully nurtured” hints at a possible long pause.

Citi economists believe that the 5-1 vote in favour of a pause along with 2018-2019 Inflation comfortably within the target range may temper down any near term rate hike expectations. While this may trigger a near term corrective move in bond yields however they believe that the broad uptrend in yields is unlikely to reverse. Hence Investors may continue to avoid any fresh long duration exposure and remain diversified in their fixed income portfolios.



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