The Fourth Bi-Monthly Monetary Policy Statement for FY 2018-2019 was released by Reserve Bank of India (RBI) today. Following were the highlights.

1. Repo Rate has been kept unchanged at 6.50%.

2. However, the stance was changed to “Calibrated Tightening” from earlier “Neutral” stance.

Consequently, the reverse repo rate and the marginal standing facility (MSF) rate / Bank rate also remain unchanged and stand at 6.25% and 6.75% respectively.

In a surprise snub to market expectation (40 out of 49 respondents in a Bloomberg survey had expected a hike) of a mild interest rate defense, RBI made it clear that it will stick to its mandate of Headline CPI (consumer price inflations) targeting. All questions pertaining to INR depreciation raised during the press conference were met with a standard response - the impact of currency depreciation has been factored into inflation projections and hence to that extent have been accounted for in the decision. The governor also reiterated that USD-INR rate is demand supply driven and RBI doesn’t take a view on the level of rupee and only curbs undue volatility.

The decision to pause was predicated on lowering of CPI forecasts – 2HFY19 lowered to 3.9-4.5% from 4.8% and 1QFY20 to 4.8% from 5% before, with risks to the upside. The MPC (Monetary Policy Committee) acknowledged that actual inflation outcomes for Q2FY19 were below projections as food inflation has remained unusually benign.

On Growth, RBI believes that private consumption has remained robust and is likely to be sustained. Also improving capacity utilizations along with increased financial resources to corporate sector augur well for investment activity. However, they also note that the both global and domestic financial conditions have tightened, crude oil prices have risen sharply and there is uncertainty around exports. With this backdrop, they retain their GDP growth projection for current year at 7.4%, while Q1FY20 has been cut by 0.1% to 7.4%. Risks here are broadly balanced.

10 yr G-Sec movement around the current & previous RBI Policies

Source: Bloomberg

Assessment & Outlook

The change in stance from “Neutral” to “Calibrated Tightening” along with lowering of inflation forecast may appear divergent and confusing to some. Citi economists are interpreting this as MPCs readiness to act promptly, in case inflation outcomes deviate materially from the projected path or in the eventuality of fiscal slippage. Citi economists are now less confident of their earlier view of 25-50 bps rate hike as they await further data on MSP and exchange rate pass through impact on inflation.

The 10yr G-sec closed @ 8.02%, down slightly from the previous close of 8.15%. Citi economists believe that the 10yr bond yields may not break below 8% in a sustained manner anytime soon in spite of likelihood of higher OMO (Open Market Operations) buy backs going forward.

On currency, Citi economists believe that with today’s RBI decision, further INR underperformance is likely. However, they believe that RBI may be forced to resort to mightier intervention strategies as USDINR gets politically sensitive and approaches psychologically important levels like 75. Clients may continue to avoid any fresh long duration exposure, focus on high credit quality and remain diversified in their fixed income portfolios.



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