Economy Update: Monetary Policy - Kotak

- MPC in its third bi-monthly meeting of FY19, expectedly decided to raise the policy repo rate by another 25 bps to 6.50%, consequently the reverse repo rate is now at 6.25%, MSF and Bank rate at 6.75%. Monetary policy stance remains neutral in consonance with the objective of achieving the medium-term target for CPI inflation of 4% +/- 2%, while supporting growth.

- We had opined in our last note, "Policy rates are likely to be raised by 25-50 bps in FY19, taking policy repo rate to 6.50%-6.75% by March'19 to keep CPI inflation anchored around 4%". With 50 bps rate increase, we expect RBI to be on pause in the next policy (decision to be announced on October 5th). Depending on monsoon, food prices and secondary effect of MSP increases and global factors, RBI could change its policy stance towards end of the fiscal, as the output gap has virtually closed.

- RBI has revised its CPI inflation projections to 4.6% in Q2FY19 and 4.8% (from 4.7%) in H2 and 5.0% in Q1FY20, including the HRA impact for central government employees, with risks evenly balanced. Excluding HRA CPI inflation is projected at 4.4% in Q2 and 4.7%-4.8% in H2 and 5.0% in Q2FY20. No change in GDP estimates projected at 7.4% for FY19, 7.5%-7.6% in H1FY19 and 7.3%-7.4% in H2FY19. GDP growth for Q1FY20 is projected at 7.5%.

Source : Equity Bulls

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