{LONGTERMINVESTORS} RBI Monetary Policy Review: Clarity on Inflation and Fiscal health is the key

 

RBI Monetary Policy Review: Clarity on Inflation and Fiscal health is the key

 

RBI sits tight on the rates – As expected

RBI decided to keep the repo rate unchanged at 6.75%, while also maintained the CRR at 4%. This move was expected, given the rise in food prices, concerns over the progress of fiscal consolidation and challenging global economic backdrop. Meanwhile, the central bank will continue with daily variable rate repos and reverse repos in order to smooth liquidity.    

 

Inflation outlook

Consumer inflation has moved higher during past five months due to uncongenial base effects and rise in prices of pulses. However, seasonal decline in prices of fruits and vegetables and descent in oil prices has moderated the climb in inflation. Meanwhile, RBI is optimistic of attaining January 2016 inflation target of 6%. Looking forward, inflation of 5% is targeted by the end of March 2017, considering the trajectory in oil markets and trend in currency markets. However, the central advocated caveat to the inflation outlook, elaborating that repercussions of the hike in salaries and pensions of Central government employees are not accounted in this projections. In addition, uncertainty over monsoon and the imponderable geopolitical impact on oil prices can also challenge the inflation targets. 

 

Growth – Moderate slowdown

The economy lost momentum in Q3 of 2015-16, restrained by slowdown in agriculture and industrial activity. Poor monsoon has taken a toll on the agricultural activity, while sluggishness in industrial activity is attributed to some deceleration in capital goods production. The central bank expects the industrial activity to rebound moderately during fourth quarter of this fiscal year. For 2016-17, growth is expected to improve gradually, with GVA growth for 2016-17 projected at 7.6%

 

Rate outlook: Clarity on inflation and fiscal health can pave the path for a cut in the rates.

RBI awaits more clarity on the inflation outlook, before taking a call on the interest rate trajectory. The central bank will also keep an eye on the structural reforms expected from the forthcoming Union Budget. If the incumbent regime manages to strike a balance between growth and fiscal prudence, then such environment can provide more leeway for the central bank to act on the rates. We expect RBI to cut the policy rates by 25-50bps in CY16.

 

 

Warm Regards,

 

India Infoline Research Team

  

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