- Repo Rate – Reduced by 25 Basis points(bps) at 6.00%
- Reverse Repo Rate – reduced by 25 bps at 5.75%
- Bank Rate & Marginal Standing Facility (MSF) Rate – 25%
- Cash Reserve Ratio (CRR) – The CRR of scheduled banks has been retained unchanged at 4.0% of their net demand and time liabilities (NDTL).
Interest Rate Outlook
- RBI’s monetary policy was largely in line with market expectations wherein after hinting at a dovish tone in the last policy, there was a 25 bps rate cut announced in the Third Bi-monthly Monetary Policy, 2017-18 (‘the policy’).
- While inflation has fallen to historic low, a meaningful segregation of transitory and structural factors still seem unclear. RBI highlights that most of upside risks to inflation like impact of the implementation of HRA(House Rent Allowance) under the 7th Pay Commission, the impact of price revisions withheld ahead of Goods & Services Tax (GST), the structural and transitory factors impacting the food inflation has not panned out yet. While the moderating inflation is owing to factors like normal monsoon, effective food supply management, almost neutral effect of GST rollout on prices, stable crude prices etc.
- Growth outlook for FY18 remained unchanged from the June projection – Real Gross Value Added (GVA) growth is projected at 7.3%, with risks possibly evenly balanced.
- The commodity price outlook as well as monsoon outlook is stable, but there seems to be uncertainty arising from the farm loan waivers which may also lead to fiscal slippage.
- The Global Business cycle and growth prospects have been improving. However, it still lacks the strength of a self-sustaining recovery. There is a weakness in the Capex cycle, evident through reduced number of new investment announcements and slow implementation of stalled projects. Hence, there is a need to revive private investment by removing infrastructure bottlenecks.
- The underlying message from the policy statement seems to be that in case of the economic recovery being slower and inflation turning out below the projected levels, there may be room for further rate cut opening up especially since the real interest rates still remain higher than the historical levels.
- As market was almost expecting a rate cut today, shorter end, medium end and longer end yields have rallied by 2-5 bps today. In our view, Consumer Price Index (CPI) may continue to be range bound at sub 4% levels with a downward bias as the favorable base effect wanes out.
- This policy announcement is but again, a reiteration of RBI’s acknowledgement of data supporting a dovish policy stance.
- Although the committee notes that the upside risks to inflation is limited and in order to support growth, a rate cut was imperative but RBI would continue to be data vigilant to decide the course on rates going forward. In our view, there may be room for a 25 bps - 50bps rate cut in 6-9 months from now.
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