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The Monetary Policy committee (MPC) presented its third monetary policy on Feb 08, 2017. In an unexpected move, the MPC kept the key policy rates unchanged and changed the stance of monetary policy from ‘accommodative’ to ‘neutral’, with all of the six members of the MPC unanimously voting in favor of the monetary policy decision. Markets were expecting a 25 bps rate cut and continuation of the ‘accommodative’ stance of the MPC. Absence of a rate cut and a change in policy statement to neutral from accommodative took the markets by surprise and resulted in 10 year G-Sec yields rising by 0.32% to close at 6.75%. Repo rate stands unchanged at 6.25%, however the underlying tone of the policy has become hawkish with the stance shifting to neutral from accommodative indicating that the rate easing cycle has ended.
Growth projection has been revised downward for FY17 to 6.9% from 7.1%, on account of short run disruptions in economic activity due to cash crunch and slump in demand due to adverse wealth effects due to demonetization. However, RBI expects growth to recover to 7.4% in FY18 on account of revival in discretionary demand held back by demonetization, transmission of rate reductions through MCLR reductions and Union Budget’s higher allocation for capex, rural economy and housing in FY18.
Though RBI’s CPI inflation projection for FY17 is below the target of 5%, upside risks to the same remains. MPC has shifted focus towards bringing the headline CPI inflation closer to 4% on a durable basis. MPC took note of the potential inflationary pressures that may emerge from uptick in crude & food prices, volatility in the exchange rate on account of global financial market developments, 7th Pay Commission recommendations on house rent allowances and increase in minimum wages. However, the MPC took comfort from the fiscal prudence shown in Union Budget for FY18 which will limit the upside risks to inflation. We expect interest rate easing cycle to have ended, with RBI having shifted its monetary policy stance from accommodative to neutral. However, the excess liquidity in the banking system and the upward movement in yields presents a good investment opportunity in the shorter end of the yield curve. The improving macro-economic scenario of the Indian economy presents good investment opportunity for Policyholders. Policyholders would be well placed to benefit from the economic revival if they continue to pay their premiums regularly and remain invested in the India growth story.
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