RBI Changes stance to "Neutral"

BY GAURAV KULSHRESHTHA | 08 FEB, 2017

Key Highlights of the Policy Statement were:

• All 6 members of the Monetary Policy Committee (MPC) voted to keep the policy repo rate unchanged @ 6.25%.
• Consequently, the reverse repo rate remains unchanged @ 5.75% and the marginal standing facility (MSF) rate and the bank rate @ 6.75%.
• The committee decided to change the stance from "accommodative" to "neutral" while keeping the policy rate on hold to assess how the transitory effects of demonetization on inflation and the output gap play out.

The pause was consistent with the out-of-consensus view of Citi economists. However, the change in stance from “accommodative” to “neutral” took most market participants by a surprise.

Bond market reacted very sharply to this change in stance and a pause in policy rates. The benchmark 10yr yield shot up to a high of 6.76% and is now trading at 6.74% (Previous Close – 6.43%).

This change in stance after two years reduces the possibility of any near term reduction in rates. However, RBI Governor indicated in the press conference that the "neutral" stance gives the monetary policy committee, flexibility to move in either direction with respect to the rates.

Citi economist believe that the chances of a 25bps cut in the April policy are now very low, and a meaningful drop in core inflation will be required for rate cuts beyond April. They believe that investors will now fully unwind all expectations for cuts and this will lead to steepening of the yield curve over the next few months.

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