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RBI maintains status quo on policy rates, as expected and becomes dovish on inflation
The RBI Monetary Policy Committee (MPC) kept key policy rates unchanged (in a 5-1 vote) and maintained its ‘neutral’ stance, as broadly anticipated by the markets. Only one of the MPC members was in favour of a 25 bps repo rate hike while the others opted for a status quo.
RBI Repo Rate Vs 10 year yield
Source: Bloomberg
RBI also cut inflation estimates across the board. In Feb 2018 policy review RBI had forecasted CPI inflation at 5.1% in Q4 FY18, and in the range of 5.1-5.6% in H1 FY19 and 4.5-4.6% in H2 FY19 (including the HRA impact), and with risks tilted to the upside. However, in this policy review it has revised downwards CPI inflation forecast for Q4 FY18 to 4.5%, for H1 FY19 to 4.7-5.1%, and for H2 FY19 to 4.4% (including the HRA impact), and with risks tilted to the upside. Further, the RBI added that excluding the impact of HRA revisions, CPI inflation is projected at 4.4-4.7% in H1 FY19 and 4.4% in H2 FY19.
RBI has attributed the revised inflation forecast to various factors as follows:
Moderation in food prices and a lower inflation trajectory expected for food prices compared to the February 2018 statement, despite a likely reversal in food prices in H1. Assumption of normal monsoon and effective supply side management by government to help in lower inflation trajectory for food prices.
Volatility in international crude oil prices has adversely impacted the RBI’s outlook on crude oil prices.
Domestic demand is expected to strengthen during the course of the year.
The statistical impact of an increase in HRA for central government employees will continue till mid-2018, and gradually dissipate thereafter.
The central bank has also highlighted various upside risks to inflation like the impact of revised formula for MSP hike on kharif crops, staggered impact of HRA revision by various state governments, any further fiscal slippage by the central government in FY18 or the medium term path, fiscal slippage by states, monsoon turning deficient, RBI’s Industrial outlook survey indicating input and output prices to rise, and finally volatility and uncertainty on global crude oil prices.
The RBI in this policy has started to use the GDP series for economic forecast instead of the GVA series used in the past policies. It said that the GDP growth for India is forecasted to increase from 6.6% (RE) in FY18 to 7.4% in FY19. This is to be helped by revival in investment activity and pick-up in global growth, which should encourage exports and boost fresh investments.
The RBI also decided to defer implementation of India Accounting standard (Ind-AS) by one year for banks. Scheduled commercial banks, excluding regional rural banks, were required to implement Ind-AS from April 1, 2018. Market Outlook:
“RBI kept policy rates unchanged as expected and turned dovish on inflation, with inflation estimates for H1 & H2 FY19 being cut. We expect the RBI to be on pause for some time, although future policy action will continue to depend on local and as well as global factors. The deferment of implementation of Ind-AS for banks, should be positive for PSU and corporate banks dealing with NPA problems, as it will help to reduce their incremental provisioning (as a result of transitioning to Ind-AS) for the fiscal year.
Bond yields had fallen sharply after the announcement of the revised government borrowing programme for H1 FY19 in late March 2018, as the gross borrowing amount was lower than expectations, and the composition of the borrowing was also favourable as it was more tilted towards short to medium term dated securities.
We have been saying for a while that the market had priced in most of the risks, and that yields were elevated. With the recent fall in bond yields, and with the 10 year yield falling by around 15 bps today after the policy announcement, we feel that yields will be range-bound in the near term. We prefer the shorter to medium term end of the yield curve presently. Policyholders would be well placed to participate in the economic revival of the India growth story, if they remain invested and continue to pay their premiums regularly.
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