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Article | Sip - Jan 01, 1970 | 05:30 AM

Policy Announcement Highlights

 No changes in key rates

Repo rate is unchanged at 6.25%. Other rates like reverse repo rate, bank rate and marginal standing facility (MSF) unchanged at 6.0% and 6.50% respectively.

Impact: Unchanged rates and less hawkish policy language paves way for future rate cut.

Statutory Liquidity Ratio (SLR) cut by 50 basis points (bps)

SLR reduced by 50 bps to 20%.

Impact: Aim to enhance banking industry profitability by say 1-2 percentage points.

Revised Inflation target

RBI expects inflation in the first half of financial year 2018 to be 2.0-3.5% and 3.5-4.5% in second half. This is much lower than previous estimates of 4.5% and 5.0% respectively.

Impact: This may translate into 50 to 75 bps rate cut in 9-12 months.

 Interest Rate Outlook

Market rallied by 8-10 bps yesterday (6th June’17) with 10 year bond at ~6.55% down by 40-45 bps from March levels. In our view, Consumer Price Index (CPI) may be in the range of 2% - 3% in H1 FY18 and ~4% in H2 FY18 with a downward bias. Further, there may be room for 50bps to 75bps rate cut in 9-12 months from now.

 Key highlights

  • The policy of RBI may be considered less hawkish compared to previous policy. With inflationary risks not materializing to the extent expected, it was one of the factors that led to the central bank reducing its CPI forecasts. The central bank now expects inflation at 2.0-3.5% in H1FY18 (Previous: 4.5%), rising towards 3.5-4.5% (Previous: 5.0%), enlisting “issues” with regard to:
  • Assessing whether the “unusually low” momentum in the April CPI reading is sustainable. Prices of food items such as pulses maybe a result of a supply glut which policy intervention might thwart going ahead. Moreover, the downward adjustment in fuel prices of petrol and diesel has begun to reverse.
  • The downtrend in core inflation might be transitory, in view of rising rural wages and strong consumption demand.
  • Risk of fiscal slip pages might be high with the announcement of farm loan wavers.
  • The impact of 7th Central Pay Commission (CPC) on CPI is an upside risk at this juncture and not factored-in into baseline projections. Goods & Services Tax (GST) is possibly not expected to have a significant impact on inflation.
  • FY18 Gross Value Added (GVA) estimates have been revised lower in accordance with Central Statistics Office’s (CSO) revised estimates (7.3%, -10bps) but RBI remains positive as:
  • Risks to RBI projections remain balanced. The MPC remains focused on keeping inflation closer to 4% on “a durable basis, keeping in mind the output gap”.
  • Recent GDP and IIP estimates suggest that the effect of demonetization have been sector-specific and transient. The economic activity had begun to slow well ahead of demonetization.
  • Remonetization of the economy might enable a pick-up in discretionary consumer spending, especially in cash-intensive segments of the economy.
  • Lower bank lending rates might support investment demand of households and stress-free corporates
  • Government spending remains robust. Downside risks to growth include global political risks, rising domestic input costs acting as a drag on profitability and the twin balance-sheet issue which might delay the revival in private sector demand.

Data Source: RBI Monetary Policy Statement, 7th June 2017

Views expressed herein should not be construed as investment advice to any party and are not necessarily those of Aditya Birla Sun Life AMC Limited(formerly known as Birla Sun Life Asset Management Company Ltd.) or any of their officers, employees, personnel, directors and ABSLAMC and its officers, employees, personnel, directors do not accept responsibility for the editorial content. Wherever possible, all the figures and data are dated, and the same may or may not be relevant at a future date. While utmost care has been exercised, ABSLAMC or any of its officers, employees, personnel, directors make no representation or warranty, express or implied, as to the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report and hereby disclaim any liability with regard to the same. Recipients are advised not to act purely on the basis of information provided herein but also seek professional advice from experts before taking any investment decisions. Neither, the Mutual Fund, the Trustees, AMC nor any person connected with it accepts any liability arising from the use of this information.

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