RBI 4th Bi-monthly Monetary Policy Highlights & Take Away Thoughts

6 Oct, 2017, 06:46AM UTC by Jaydip Mehta

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–  Repo, Reverse Repo, Marginal Standing Facility and CRR left unchanged at 6%, 5.75%, 6.25% and 4% respectively.


– SLR lowered by 50 bps to 19.5%; The ceiling on SLR securities under ‘Held to Maturity’ (HTM) will also be reduced from 20.25 per cent to 19.50 per cent of banks’ NDTL in a phased manner, i.e., 20.00 per cent by December 31, 2017 and 19.50 per cent by March 31, 2018.


Inflation estimates revised marginally higher


– Second half of FY18 CPI Inflation estimates were revised to suggest a range between 4.2%-4.6% or 4.2% in Q3 FY18 and 4.6% in Q4 FY18 compared to its August policy when it was expecting 4% in Q3 FY18 and 4.5% in Q4FY18.


-RBI is cautious on the upside risk to inflation from widening of the fiscal gap. Its Monetary Policy Report states that an increase in the fiscal deficit to GDP ratio by 100 bps could lead to a permanent increase of about 50 bps in inflation.


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Growth projections revised lower


– FY 18 GVA growth projections lowered to 6.7% from 7.3% estimates in the Aug’2017 policy.


– The MPC acknowledges the likelihood of output gap widening but remains dependent to make out if it is temporary or persistent.


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Policy Stance


– Retained neutral stance with MPC members voting 5-1 to keep rate unchanged at 6%.


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Analysis & Concluding thoughts


–  The policy action on leaving key lending rates unchanged was on the expected lines and in concurrence to our belief that the growth slowdown is seen to be transitory due to the implementation of GST.


–  RBI having lowered the GVA growth forecast for FY18 by 60bps was surprisingly unmoved on the monetary policy response and left it to be assessed after the Q2FY18 GVA growth data due for release in November, ahead of the December policy. Our GVA growth estimate for FY18 is seen at 6.5%.


– While we expect headline CPI Inflation to average ~ 3.9% in Q4FY18 and seen to average 4.5% in Q4FY18 vis-à-vis RBI’s projections at 4.2% and 4.6%, the next policy action would largely be dependent on several factors including the path of CPI Inflation, the evolving growth trajectory, fiscal measures by the Central Government in order to support the growth and the global economic activity.


– At the outset, we believe the concerns on widening fiscal gap seems to be more pronounced with RBI and any significant fiscal stimulus would be seen to be restrain  further policy rate accommodation.

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