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Published on 6/12/2018 1:14:23 PM | Source: Motilal Oswal Securities Ltd

RBI keeps policy rates and stance unchanged - Motilal Oswal

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RBI keeps policy rates and stance unchanged

Feb meeting decision would need much deliberation – fiscal discipline (=weak GDP) could lead to a rate cut

*   As expected, the RBI kept its policy rates and stance unchanged. While the decision to keep the policy rate unchanged was unanimous, Dr Ravindra Dholakia voted to change the stance to neutral.

*  What, however, took us by surprise was the RBI's economic projections. The central bank sharply cut its 2HFY19 CPI inflation forecast from 3.9%-4.5% to 2.7%-3.2%. However, it maintained its 2HFY19 and FY19 GDP growth projections at 7.2-7.3% and 7.4%, respectively.

*  While CPI will be sub-3% in Nov-Dec'18, it could move toward 4% by Mar'19 – higher than the RBI's projections – in our view. Besides, we expect real GDP growth to come in at ~6.5% in 2HFY19, well below the RBI’s estimate of 7.2-7.3%.

*  Accordingly, the February policy decision would need considerable deliberation, wherein the fiscal discipline and the FY20 Union Budget will be more important than inflation. If inflation evolves in line with the RBI’s expectations and the government maintains fiscal discipline (implying weak GDP growth), it could set the stage for a rate cut.

 

RBI maintains status quo…:

The MPC decided to keep the policy rates unchanged – the repo rate at 6.5%, the reverse repo rate at 6.25% and the marginal standing facility (MSF) rate at 6.75% (Exhibit 1) – in its fifth bi-monthly Monetary Policy Review for FY19. The move was in line with our expectation and market consensus. The RBI also maintained its policy stance of ‘calibrated tightening’. While the decision to keep the policy rate unchanged was unanimous, Dr Ravindra Dholakia voted to change the stance to neutral.

 

…while cutting inflation projections sharply…:

The RBI sharply cut its 2HFY19 inflation projections to 2.7-3.2% from 3.9-4.5%. It cited the broad-based weakening in food prices and the sharp drop in crude oil prices as the key reasons for lowering projections, while maintaining that there was considerable uncertainty with regards to projections in the short term. Further, the RBI projects inflation at 3.8-4.2% in 1HFY20, with risks tilted to the upside.

 

…but growth projections remain unchanged :

The RBI maintained its 2HFY19 and FY19 GDP growth projections at 7.2-7.3% and 7.4%, respectively. It expects growth to improve marginally to 7.5% in 1HFY20, with some downside risks.

 

*   Fiscal discipline may lead to a rate cut in Feb policy :

While the policy is in line with our expectations, the RBI’s economic projections have taken us by surprise. We believe that while CPI will be sub-3% in Nov-Dec'18, it could move toward 4% by Mar'19 – higher than the RBI's projections. Besides, we expect real GDP growth to be ~6.5% in 2HFY19, well below the RBI’s projections of 7.2-7.3%. For FY19, we expect GDP growth at ~7% v/s the RBI’s projection of 7.4%. Accordingly, the February policy decision would need considerable deliberation, wherein the fiscal discipline and the FY20 Union Budget will be more important than inflation. If inflation evolves in line with the RBI’s expectations and the government maintains fiscal discipline (implying weak GDP growth), it could set the stage for a rate cut.

 

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