50 bps it is! Will the RBI pause now?: CRISIL

CRISIL's monetary policy reviewPolicy Brief: In a surprise move, the Reserve Bank of India (RBI) cut its repo rate by 50 basis points (bps) to 6.75%. The extent of the slash was unanticipated, but its timing was in line with our view that sufficient clarity on monsoon, pace of economic recovery and a likely delay in the policy rate hike by the US Federal Reserve will open up room for a repo rate cut in September. On Tuesday, the RBI said a bulk of the conditions required for further accommodation – flagged in its previous monetary policy review -- have been met. The RBI lowered its GDP growth forecast by 20 bps to 7.4% (CRISIL GDP growth forecast, too, is 7.4%) and its January 2016 inflation forecast to 5.8% from 6% estimated last month. In addition, it has allowed for a gradual increase in the limit on foreign portfolio investments in central and state government bonds. Also, the ceiling for bank investments under the held-to-maturity category will be reduced over time from 22% to 21.5%. Our view: The RBI has cut the repo rate by 125 bps since it first started lowering the rate in January this year. With inflation within target, continued windfall from lower global oil and commodity prices, postponement of the rate hike by the Fed, and the need to push up pace of domestic demand recovery prompted the RBI’s move. The onus is now on the government to remove impediments to transmission while following a prudent fiscal path, and for banks to pass on the rate cut. The RBI’s policy will remain accommodative but it will maintain caution in terms of demand-side pressures on inflation that could arise from the Seventh Pay Commission payout expected in the next two fiscals. Plus the RBI has also set the CPI inflation target at ~5% by end 2016-17 and reiterated it at 4% by end 2017-18. Therefore, the pause from hereon could be a prolonged one unless there is a significant positive surprise on inflation.DisclaimerCRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources, which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL Limited has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. The Centre for Economic Research, CRISIL (C-CER) operates independently of and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular operations obtain information of a confidential nature that is not available to C-CER. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval.

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