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In line with our expectations, the RBI has reduced the benchmark repo rate by 0.25% to 6.5% in its first Bi-monthly Monetary Policy statement of the new fiscal year. However, with a view to move from a liquidity deficit to a position closer to neutrality, the policy rate corridor has been narrowed from 1% to 0.5% by increasing the Reverse Repo rate to 6.00% . Nonetheless, the underlying tone of the policy remains accommodative, and would be guided by macro economic data, clarity on the implementation of 7th Pay Commission recommendations /OROP and the monsoons.
RBI has projected GDP growth for FY17 at 7.6%. With the implementation of the 7th Pay Commission recommendations and OROP in the year, consumption growth could contribute to additional upside in growth estimates and in continued monetary policy accommodation. RBI also highlighted concerns from weak private investment in the face of low-capacity utilization and expects CPI inflation during the year to remain around 5%. However, normal monsoons and an upturn in the global commodity cycle remain the key concerns to meet the forecasts of the central bank.
We expect interest rates to remain benign with a downward bias over the coming months and expect the RBI to stay accommodative, and maintain banking system liquidity closer to neutral levels. With the government outlining its commitment to fiscal consolidation in the Union Budget and the RBI working towards a low interest rate environment, the macro-economic indicators of the economy are set to improve over the coming year. Policyholder’s are requested to continue paying their premiums regularly and benefit from the unfolding India story over the coming few years.
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