RBI MAINTAINS STATUS QUO – DOES THE RIGHT THING!

By Ruma Dubey

It did not come as a surprise at all. RBI did the right thing and kept the rates unchanged. Unlike what the media was going rah-rah about, a rate cut at this juncture was simply not justified and for once, we all can heave a sigh of relief and tell ourselves that RBI did what was right and not what the Govt wanted it to do.

A quick look at the highlights of the policy:

• Keep the repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 per cent.
• Consequently, the reverse repo rate under the LAF remains unchanged at 5.75 per cent
• The marginal standing facility (MSF) rate and the Bank Rate remains at 6.75 per cent.
• The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent.
• The economic growth for FY17 lowered by 25-50 bps v/s baseline growth assumption of 7%.

The RBI or rather the MPC decided to go for a ‘neutral’ stance based on global as well as domestic reasons. Globally, it expects advances economies and emerging economies to do better, energy prices to pick up momentum, financial conditions are also likely to tighten. The RBI has said, “the appetite for

risk has returned in the advanced economies, buoying equity markets and hardening bond yields as a response to the growing likelihood of further increases in the Federal Funds rate during the year.” Thus the rising dollar and the falling rupee is also cited as one of the reasons why RBI has adopted this neutral position.

On the domestic scenario, RBI has said that inflation was low mainly on account of seasonal factor and this was led by low vegetable prices. Looking ahead, it expects pulse prices to remain soft but expects vegetable prices to rise, once again due to seasonal factors and effects of demonetization wearing off.

RBI is very bullish for FY18 and hopes that discretionary consumer demand held back by demonetisation will bounce back. It expects retail trade, hotels and restaurants, and transportation, as well as the unorganised sector to leave behind the effects of demonetization and demand in these sectors is also expected to perk up. Thirdly, RBI feels that due to demonetization, banks are flush with funds and this has finally pushed the banks to lower rates and this in turn, as per RBI, is expected to perk up demand and consumption. And last but not the least, RBI is hoping that given the sops announced in the Budget, rural economy and affordable housing will lead the growth story.

This time too, like last time, all six members voted in favor of maintaining the status quo and the next RBI meet will happen on 5^th and 6^th of April’17.

So for the markets, this event is also over and done with while we wait for the IIP numbers to come in Friday evening. Markets do not give too much credence as such but nevertheless, it is a macro data and used by RBI to make crucial decisions. It is now back to company specific news and the elections results will pretty much grab news headlines in March.