Monetary Policy Review - April 2017

Source: HDFCMF

The Monetary Policy Committee (MPC) voted unanimously to keep the policy repo rate unchanged at 6.25%. The cash reserve ratio was also left unchanged. However, RBI has narrowed the policy rate corridor to 50bps from 100bps. Thus, it hiked the reverse repo rate by 25bps from 5.75% to 6.0% and cut the marginal standing facility (MSF) rate by 25bps to 6.50% from 6.75%. The narrowing of policy rate corridor (repo rate 6.25%; reverse repo rate 6.0%) is aimed at bringing the weighted average overnight call rate closer to policy repo rate.

As per RBI, headline Consumer Price Inflation (CPI) inflation is likely to be below its target of 5% for Q4 FY17 due to below 4% readings for both Jan'17 and Feb'17. For FY18, inflation is projected to average 4.5% in H1 FY18 (v/s 4-4.5% earlier) and 5% in H2 FY18 (v/s 4.5-5% earlier) with risks evenly balanced currently. RBI has retained its gross value added (GVA) growth projection at 7.4% for FY 18 as against 6.7% for FY17 with risks evenly balanced.

The MPC reiterated its commitment to bring headline CPI inflation closer to its target of 4% on a durable basis and in a calibrated manner. Thus, the MPC decided to keep the repo rate unchanged while maintaining its neutral policy stance. The future course of monetary policy will be largely data dependent on how macroeconomic conditions are evolving.

Conclusion and Outlook

As expected the MPC in its credit policy review today kept policy repo rate unchanged, however, it surprised the markets by narrowing the policy rate corridor from 100bps to 50bps. Thus, there was a reversal in yields of about 10 bps across the yield curve.

Given the uncertainty driven by outcome of monsoon, roll out of GST and global factors such as US interest rates, RBI is likely to remain in a prolonged pause mode in our opinion. In such a scenario yields are likely to remain range bound.

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