RBI DOES THE EXPECTED – NO RATE HIKE AND TONE IS HAWKISH

By Ruma Dubey

RBI did today what was widely expected. The rates were kept unchanged and post the Budget, once again as was widely expected, the comment was mostly hawkish.

The Monetary Policy Committee (MPC) raised its inflation forecast and kept its inflation target at close to 4% while highlighting the risks which could increase inflation. And the message which came across loud and clear is that the rate hike could very much become a reality in FY19.

A quick highlights of the Policy:

• To keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6%
• Reverse repo rate under the LAF remains at 5.75%
• Marginal standing facility (MSF) rate and the Bank Rate at 6.25%.
• Stance of the policy is neutral with the objective of achieving the medium-term target for CPI at 4% within a band of +/- 2 per cent, while supporting growth.
• Inflation is now estimated at 5.1% in Q4, including the HRA impact.
• CPI inflation for FY19 estimated in the range of 5.1-5.6% in H1 and 4.5-4.6% in H2.
• Inflation outlook to be shaped by international crude oil prices, uptick in non-oil industrial raw material prices and monsoon.
• GVA growth for 2017-18 is projected at 6.6%.

Growth to be driven:

• Stabilizing GST
• Revival in investment cycle
• Improvement in credit offtake
• Large resource mobilisation from the primary capital market
• Improving capital goods production and imports
• Continuation in the process of recapitalisation of PSU banks
• Though export growth is expected to improve, elevated commodity prices, especially of oil, may act as a drag on aggregate demand.
• GVA growth for FY19 is projected at 7.2%; in the range of 7.3-7.4% in H1 and 7.1-7.2% in H2

RBI has also cited several uncertainties on the inflation outlook-

• Staggered impact of HRA increases by various state governments
• Pick-up in global growth may exert further pressure on crude oil and commodity prices
• Increase in MSP prices for kharif crops and customs duty as proposed in the Budget
• Impact of fiscal slippages

This was a very detailed report, giving a very good read about the current developments, globally and in India and assessing the risks to growth and inflation in the coming months.

This was very much on the expected lines, with no surprises here. The markets have discounted this policy and it will once again be about specific companies – more micro than macro.

For a complete read of the policy: http://downloadpolicy3.rbi.org.in/PR2146760D7C7B481B4BCC9B0496C9E3390F07.PDF