RBI’s second bi-monthly monetary policy statement

Brief: RBI adopts wait and watch policy and holds Repo at 6.25%; a sticky core CPI as well as excess liquidity in the system have been the primary reasons for the call

Impact: Neutral

The Monetary Policy Committee (MPC) of the RBI stayed put with the prevailing Repo despite robust consumption numbers and record low inflation levels. Even though the Ministry of Finance has been with the view that a sub 3% CPI qualifies for a rate cut, the MPC’s views were more in line with the persistence of core inflation as well as excess liquidity in the system. Post demonetization, banks still hold significant amount of incremental deposits (through their CASA accounts), which have not been appropriately reabsorbed into the M0/M1, i.e. currency in hand. Related, a cut in the SLR by 50 bps is a signal to commercial banks that more capital can be deployed to rescue the flagging credit offtake numbers. In a way, the move is aimed towards lowering the dependence of banks on government debt to strengthen their balance sheets. The high stress levels in banking assets and its negative impact on the general macroeconomic conditions was noted by the committee.

However, with the El Nino effect, now deemed favorable for the Indian monsoon, the MPC has toned down its hawkish tone to an extent and now estimate the CPI to average 3.5% in FY18. International scenarios too have been deemed resurgent and exports are estimated to strengthen. Though a strengthening Rupee has been aiding rising imports and hence an unfavorable balance of trade, the condition also signifies healthy domestic consumption conditions. SMERA believes that the MPC will wait and watch until the real impacts of monsoon, impending GST as well as the new WPI series pans out in the near term. Also the volatility in the international commodity prices will be better known in the near term. At this time, the real concern for the MPC will be maintaining its credibility, even when there is tremendous pressure from the fiscal side.