Views on RBI Monetary Policy - Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance Limited

"The rate cut of 25bps by MPC is on expected lines. MPC though has maintained the neutral stance on policy front as the inflation trajectory is still seen as blurred between structural and transitory factors at play. The sharp drop in June inflation to 1.5% and core inflation 3.9% has prompted the rate cut. MPC will probably take note of developments in inflation post HRA and GST related impacts materialize.

MPC has maintained the forecast on growth at 7.3% and year end inflation estimates at above 4%. RBI believes there is the urgent need to revive private investments and remove infrastructure bottlenecks through collective efforts from Government and the central bank.

Bond market got what was expected in the form of lower policy rate and bond yields should now enter into a consolidation mode. Markets will be watchful of inflation development, evolving monetary conditions in developed markets & OMOs for future cues. 10y bond yields will trade in the range of 6.30-6.60% in near term.

We believe the neutral stance will give RBI the chance to reduce rates by another 25bps if inflation trajectory remains benign (barring some spikes in vegetable prices) at less than 4% mark for next 6-9 months or the next easing may come if growth doesn't bounce back as RBI still estimates GVA growth at 7.3%. On the other hand, the neutral stance will enable RBI to remain on a long pause till the time inflation remains around 4% mark".

Source : Equity Bulls

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