Repo rate unchanged at 6.50%, Reverse-repo at 6.25%

In its fourth bi-monthly policy review, the Reserve Bank of India kept key rates unchanged.

Oct 05, 2018 06:10 IST India Infoline News Service

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The Reserve Bank of India (RBI) has mentioned that the decision of its Monetary Policy Committee (MPC) is consistent with the stance of calibrated tightening in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.
In its fourth bi-monthly policy review, RBI kept the key policy rates unchanged with the reverse-repo rate at 6.25%, repo at 6.50%, and MSF at 6.75%.

In its previous policy in August, it had projected CPI inflation at 4.6% in H1 and 4.8% in H2, and 5% in Q12019-20. However, the actual inflation outcomes were below projections as the expected seasonal increase in food prices did not materialize and inflation, excluding food and fuel, moderated.
The Indian central bank has mentioned that several factors are considered when assessing the inflation outlook:
  1. Food inflation has remained unusually benign, which imparts a downward bias to its trajectory
  2. The risk to food inflation from spatially and temporally uneven rainfall is also mitigated
  3. Price of the Indian basket of crude oil has increased sharply by $13 a barrel since the last resolution
  4. International financial markets remained volatile with EME currencies depreciating significantly
  5. The HRA effect came off its peak in June and is dissipating gradually on expected lines
Based on these assessments, RBI projects inflation at 4% in Q2, 3.9-4.5% in H2 of 2018-19, and 4.8% in Q12019-20 with upside risks.
It also added that though the projection of inflation has been revised downwards, the outlook is clouded with several uncertainties such as:
  1. Aimed at ensuring remunerative prices to farmers for their produce
  2. Oil prices remain vulnerable to further upside pressures
  3. Volatility in global financial markets continue to impart uncertainty to the inflation outlook
  4. Increase in input prices combined with rising pricing power
  5. If any fiscal slippage will have a bearing on the inflation outlook
Thus, under such an environment, the inflation outlook calls for a close watch over the next few months.
Further, the RBI retained GDP growth projection for 2018-19 at 7.4%, 7.5% in Q2FY18-19, and 7.3-7.4% in H2, with risks evenly balanced; while GDP growth for Q12019-20 is now projected slightly lower at 7.4% against the earlier projection of 7.5%.
It has mentioned the below assessment for projecting the GDP trajectory:
  1. GDP print of Q12018-19 was significantly higher than projected in the August resolution
  2. Private consumption has remained robust and is likely to be sustained even as the recent rise in oil prices may have a bearing on disposable incomes
  3. Capacity utilization is seen improving, larger FDI inflows, and increased financial resources are seen as boosting the investment activity.
  4. However, it mentioned that investment activity has risk associated with it as the financial conditions in the global and domestic markets are seen to be tightening. In addition, the rising crude and other input costs may further drag it down
  5. It mentioned that the recent depreciation of the rupee could be muted by the slowing down of global trade and the escalating tariff war.
Overall, the RBI has decided to keep the policy repo rate unchanged. It reiterates the commitment to achieving the medium-term target for headline inflation of 4% on a durable basis.

It also mentioned that global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and the tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals.

In the backdrop of the current policy, we believe that one should continue to look at investing in the short and medium-term of the curve. One can opt for FMPs and accrual debt mutual funds for an investment horizon of 18-36 months.

The 10-year benchmark, which was trading at around 8.14% before the policy, fell to 8.04% and is now trading at 8.05% as the markets had expected a rate hike.

However, while the yields saw a relief, rupee depreciated further to touch a high of 74.23 as a majority of the market participants expected rate hikes in order to contain the falling rupee.

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