Five Key take away from today’s RBI Monetary Policy

Policy rates kept unchanged…• The RBI kept policy rates

unchanged in today’s meeting.

• The repo and reverse repo rate stay at 6.5% and 6%, respectively.

• CRR is also kept at 4% of net demand and time liabilities (NDTL).

…and projections also retained

• Following the (negative) surprise in April’s inflation reading, the RBI feels the future trajectory is somewhat more uncertain.

• Nevertheless, the inflation projection is kept intact and expected to continue decelerating modestly and remain around 5% during 2016- 17 (same as in April policy).

• The GVA growth projection is also retained at 7.6% for 2016-17, with risks evenly balanced.

Inflation projections, however, come with an ‘upward bias’

• Notwithstanding unchanged inflation projections, the RBI sees an ‘upside bias’.

• The press release states “…considerable uncertainty surrounds these projections, which should be clarified by incoming data in the next few months…”.

Monetary easing cycle closer to an end…:

• The rising uncertainty over inflation projections could be considered as slightly hawkish. Accordingly, one might doubt further cuts in policy rates.

• However, we expect inflation to subside

after the low base effect wanes out in August 2016.

• If so, there could be one more rate cut in the August meeting before the RBI goes for a prolonged pause.

…however, liquidity support expected to continue.

• Irrespective of more cuts, the RBI is certain to remain in accommodative mode and provide adequate liquidity to reduce the liquidity deficit closer to neutrality.

• As per our projections and calculations, it implies that the RBI would conduct open market operations (OMOs) worth INR1,700b in FY17, which is likely to bring down bond yields towards 7% by the end of March 2017

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