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RBI keeps rates unchanged; maintains neutral stance
No rate action expected in remaining part of FY18
6 December 2017
The Economy Observer
The Monetary Policy Committee (MPC) decided to maintain status quo on rates and its policy stance in its fifth bi-
monthly monetary policy meeting held today. The decision to hold rates was taken with a majority of 5-1 votes and was
in line with market expectations.
As far as the economic forecasts are concerned, the RBI increased its inflation forecast for 2HFY18 slightly to 4.3-4.7%
from 4.2-4.6% earlier. However, it maintained its FY18 real GVA growth forecast at 6.7%. The central bank expects a
sharp acceleration in growth to 7% in 3Q and further to 7.8% in 4Q, from 6.1% in 2QFY18.
We expect inflation to rise towards 5% by March 2018, primarily on account of low base. On the other hand, we expect
real GVA to rise more slowly than the RBI’s expectations. The combination of higher inflation due to low base and weak
growth is unlikely to allow the RBI to change rates in the remaining part of FY18.
RBI keeps rates unchanged, in line with expectations:
The Monetary Policy
Committee (MPC) kept policy rates unchanged – repo rate at 6%, reverse repo
rate at 5.75%, and marginal standing facility (MSF) rate at 6.25%
(Exhibit 1) –
in
its fifth bi-monthly policy meeting today. This was in line with our as well as
market expectations. The decision to hold rates was taken with a majority of 5-1
votes. Like the last meeting, Dr Ravindra Dholakia voted for a 25bp cut in this
meeting also. The MPC continued with its ‘neutral’ policy stance.
Inflation projections nudged up slightly…:
The RBI increased its inflation
projections for 2HFY18 slightly to 4.3-4.7% from 4.2-4.6% earlier. It cited upside
risks to inflation owing to a firming up of three-month ahead and one-year
ahead household inflation expectations as well as expected pass-through of the
increase in input prices to output prices by firms. Further, a possibility of fiscal
slippage and global financial stability also pose risks. The RBI stated that these
risks could be offset by seasonal moderation in prices of fruits & vegetables and
the recent lowering of GST rates.
…while growth forecasts maintained:
The RBI had cut its GVA growth projection
for FY18 to 6.7% from 7.3% in the previous policy meeting. It retained this
projection, expecting GVA growth to accelerate to 7% in 3Q and further to 7.8%
in 4Q from 6.1% in 2QFY18. The central bank believes that risks in GVA forecasts
emerge from increases in oil prices and shortfall in agricultural production,
which could be offset by revival in credit demand. We believe that the RBI’s
2HFY18 estimates are on the higher side.
No rate action expected in remaining part of FY18:
We expect inflation to rise
to 4.3% in November 2017 and move further up to touch 5% by March 2018,
primarily on account of low base. Core inflation, however, is likely to be capped
at ~4.7%, up from 4.4% in the past two months. On the other hand, we believe
that RBI’s GVA forecasts are highly ambitious and will be substantially under-
achieved. Overall, the combination of higher inflation due to low base and weak
growth is unlikely to allow the RBI to change rates in the remaining part of FY18.
Nikhil Gupta – Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Rahul Agrawal – Research analyst
(Rahul.Agrawal@motilaloswal.com); +91 22 3982 5445
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