Mixed Macro – Convoluted Monetary Policy options

By Gaurav Kulshreshtha | 22 SEPTEMBER 2017

  • The 1Q FY2018 GDP growth was reported at 5.7%YoY. This was even weaker than the estimates of Citi economists (Citi: 6.3%, Cons: 6.5%). This was a significant deviation from the 7.7%YoY GDP growth reported in 1H FY2017, before the demonetization shock kicked in.
  • The July IIP (Index of Industrial Production) was reported at 1.2% YoY, indicating that Indian economy may be going through a soft patch.
  • The August Consumer Price Inflation (CPI) climbed to 3.4% YoY, up almost 100bps from the previous month. This sharp jump was primarily due to a combination of persistently high vegetable prices (tomatoes +17bps, onions +38bps), the HRA impact on housing (+7bps), higher retail fuel prices (+14bps) and some increase in service inflation possibly due to GST introduction (+5 to 10bps).
  • Citi Economist expect CPI inflation to rise further

    Source: Citi Research, CEIC.

  • The Core CPI has also registered a sharp jump to 4.5% in August Vs. 3.9% in July. Citi economists believe that the core inflation can rise to more than 5% before the end of current financial year. This may be a bigger cause of concern as a rise in core inflation further complicates monetary policy options.
  • Citi economists believe that in its October Monetary Policy review, RBI is likely to acknowledge the increasing growth risks and may have to revise down its FY18 growth estimate of 7.3% (Citi economists have revised down FY18 growth estimates to 7% from 7.5% earlier). Citi economists expect a 25bps rate cut in Q4 FY18, once headline CPI peaks out closer to the 4-4.5% mark and the underlying growth momentum remains soft. By then greater clarity may emerge on the NPA resolution process, which has been one of the factors behind RBI keeping real policy rates high.
  • Thus, given the limited room for further rate cuts, investors may avoid any fresh long duration exposure and remain diversified in their fixed income portfolios.



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