Monetary Policy Review - RBI maintains status quo - Angel Broking

Monetary Policy to remain accommodative; RBI cautious on inflation

The Reserve Bank of India (RBI) has kept the key policy rates unchanged in its bi-monthly Monetary Policy Review today, which is along the expected lines. The RBI has revised upwards its inflation projections for FY2017 to 5% vs 4.8% earlier, without considering the implications of the implementation of the seventh pay commission, while it has retained its inflation projections of 6% for January 2016. However, the governor has highlighted that the central bank will maintain an accommodative policy stance and further course of action will depend on the government's expenditure in the forthcoming Union Budget. The RBI also has said that economic activity has lost momentum during 3QFY2016 but it retained its GDP growth target for FY2016 at 7.4%, with a downward bias, while expecting FY2017 GDP to be at 7.6%. We believe there remains headroom for a rate cut going ahead, but more clarity is to emerge post the budget.

Policy Measures

- Policy repo rate under LAF kept unchanged at 6.75%.

- Consequently, reverse repo rate under LAF remains unchanged at 6.25%, and the marginal standing facility and bank rate remain unchanged at 7.75%.

- Cash Reserve Ratio of scheduled commercial banks unchanged at 4% of net demand and time liabilities (NDTL).

- Continued providing of liquidity under overnight repos at 0.25% of bank-wise NDTL at repo rate and liquidity under 14 days term repos as well as longer term repos of up to 0.75% of NDTL of the banking system through auctions.

RBI continues to be accommodative

As expected, the RBI has decided to keep the key policy rates unchanged. This move comes at a time when the union budget is approaching in the current month. The central bank stated that it continues to be accommodative while awaiting further data on the development of inflation.

RBI expects inflation to be around 5% by the end of 2016-17 under the expectations of normal monsoon and international crude oil prices and exchange rates broadly sustaining at the current levels. The implementation of the 7th Pay Hike Commission proposals, and its effect on wages and rents, will also play a role in the central bank's future moves.

The RBI expects the near-term outlook for industrial activity to be constrained by adverse base effects in 4Q and still weak exports, although the pick-up in corporate profitability on the back of declining input costs may provide an offset.

The central bank expects the GDP growth for 2015-16 at 7.4% (with a downward bias) and 7.6% for FY2016-17.

The RBI is concerned that weak domestic private investment demand, reemergence of concerns relating to stalled projects, excess capacity in industry, and sluggish external demand conditions dampening export growth could act as headwinds for the economy.

OutlookThe bank states that the Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened. The central bank continues to be accommodative even as it leaves the policy rate unchanged, while awaiting further data on the development of inflation. Any move of structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5% by the end of FY2016-17.

Source : Equity Bulls

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