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The Monetary Policy committee (MPC) presented its second monetary policy for the fiscal year on June 07, 2017. In line with our expectations, the MPC voted (5 – 1) in favour of keeping the policy repo rate unchanged at 6.25%, while maintaining the ‘neutral’ stance of the monetary policy and remaining watchful of incoming data. RBI cut Statutory Liquidity Ratio (SLR) to 20% from 20.5%. The yields reduced by 10 bps across maturities, with 10 year G-Sec yield falling by 7 bps to close at 6.56% due to downward revision in MPC’s inflation projections.
While the MPC noted the abrupt moderation in CPI inflation for April (2.99%), the MPC decided to leave the policy rate unchanged due to considerable uncertainty regarding the evolving inflation trajectory and to avoid any risks due to disruptive policy reversals later. The MPC noted that the current moderation in inflation was a combination of factors like demonetization, excess supply especially in food items etc. However, the MPC took note of the potential inflationary pressures that may emerge from global political and financial risks, 7th Pay Commission recommendations, high general government deficit exacerbated by farm loan waivers.
Though growth projection has been revised downward for FY18 to 7.3% from 7.4%, RBI expects growth to remain strong on account of revival in discretionary demand with continuing re-monetization, transmission of rate reductions through MCLR reductions and Union Budget’s higher allocation for capex, rural economy and housing and pickup in private investment with improving business environment in FY18.
Though headline CPI inflation is expected to remain low in the near term due to low food prices and on account of the effects of demonetization, we would remain watchful on how sustainable these factors are. It is expected that the interest rate easing cycle has broadly come to an end, possibly with some room for accommodation left, depending on the evolving inflation trajectory over the coming months. 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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