Quick Update on RBI's Third Bi-Monthly Monetary Policy Review for 2017/18 August 10, 2017
Quick Update on RBI's Third Bi-Monthly Monetary Policy Review for 2017/18
Author : iFAST Research Team

Quick Update on RBI's Third Bi-Monthly Monetary Policy Review for 2017/18

In the Third Monetary Policy Statement, 2017-18, the Monetary Policy Committee (MPC) cut the policy rate by 25 basis points, which came in-line with market expectations to maintain a neutral stance on its monetary policy. The reason for the easing in the policy rate today was on account of the fact that the upside risks to inflation had either reduced or not materialised due to the following:

  1. The baseline path of headline inflation excluding the HRA impact has fallen below the projection made in June to a little above 4% by Q4;

  2. Inflation excluding food and fuel has fallen significantly over the past three months and;

  3. The roll-out of the GST has been smooth and the monsoon has been normal.

However, the MPC continued to be neutral as far as the policy stance is concerned because they still believe that inflation is going to show an upward movement from here.

Although RBI’s decision to cut the policy rate was a welcome step, the tone in the document was hawkish. The MPC had concerns on the inflation front on account of (1) the implementation of farm loan waivers by States which could lead to fiscal slippages; (2) implementation of States salary and allowances which has not been factored into the inflation projection as there is a lack of clarity on the timing; and (3) high frequency indicators which are suggesting that price pressures are building up in vegetables and animal proteins in the near months.

The MPC also talked about some of the positives which could keep inflation under check in the coming months. The successful normal monsoon along with effective food management which has the capability of moderating food inflation, continuation of the general moderation of price increases in CPI excluding food and fuel and the stability in the international commodity prices can keep the inflation on a downward trajectory.

The document also highlighted that the MPC emphasized the need to increase the flow of credit to productive sectors. The committee was in view that there are urgent needs to spur private investment, remove bottlenecks in the infrastructure sector and focus on the Pradhan Mantri Awas Yojana for housing needs of all. It was clearly mentioned that the RBI and the Government are working together to resolve the stressed corporate borrowers and recapitalise the public-sector banks within the fiscal deficit target.

Our Take

All in all, the policy makers within India's economy continue to remain focused on paving a solid long-term growth path for the fastest growing economy in the world. The current macroeconomic picture within India is still painting a decent picture at this juncture. While we note that its valuations may appear stretched at this juncture, we believe that its various structural reforms and growth stories are still formulating an attractive investment destination for long-term investors.

See: Manulife India Equity Fund

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