RBI Policy – Lower Growth, Higher inflation


The Fourth 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 members, 5 voted in favour of the monetary policy decision, while 1 voted for at least 25bps repo rate cut. As anticipated, RBI expressed concern on the loss of Growth momentum in Q1 of 2017-18 and has revised down its projections of real GVA (Gross Value Added) for 2017-18 to 6.7% from the earlier projection of 7.3%.Inflation forecast has been marginally revised upwards, RBI now expects inflation to rise from its current level and range between 4.2-4.6% in the second half of 2017-18.

Some of the other important developmental measures that were announced by RBI were*:

  • Reduction in SLR: As a part of the transition to a Liquidity Coverage Ratio (LCR) of 100 per cent by January 1, 2019, it is proposed to reduce the Statutory Liquidity Ratio (SLR) by 50 basis points from 20.0 percent to 19.50 per cent of banks’ net demand and time liabilities (NDTL) from the fortnight commencing October 14, 2017.
  • Other announcements include measures to improve monetary policy transmission, task force on public credit registry, Legal Entity Identifier registration for corporate borrowers, opening of current accounts by co-operative banks with RBI, Peer to Peer (P2P) NBFC regulations etc.

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

Source: Bloomberg

Assessment & Outlook

Despite the steep downward revision in their growth expectation, RBI has kept policy rates unchanged. Their Q4 FY18 GVA forecast of 7.7% suggests that they are hopeful of a recovery. Also even after adjusting the inflation expectations higher, they highlight further upside risks to inflation as these forecast do not take into account the impact of any fiscal slippage or impact of state level implementation of HRA.

The policy statement indicates that for further rate cuts to materialize, four preconditions need to be satisfied:

  1. A more entrenched growth slowdown that forces RBI to believe that it may not be transient.
  2. Significant undershoot of inflation outcomes as regards to their model forecasts.
  3. Fiscal slippage within tolerable limits.
  4. Contained global uncertainties in the wake of central bank policy normalization.

Citi economists are now less confident of their call of a 25bps rate cut in Q4 FY18 as the MPC stays fixated to its inflation mandate and hopes that the growth shock is transient. The hurdle for rate cuts is now substantially higher as meeting all the four preconditions may be difficult. However, Citi economist still think that actual CPI can undershoot RBI projections, opening up the space for one 25bps rate cut in a soft growth environment.



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