In its second bi-monthly monetary policy the RBI kept rates unchanged, with the repo rate remaining at 6.5 per cent and cash reserve ratio at 4.0 per cent. We highlight some of the key points from the policy statement and from the subsequent press conference:
The RBI stated that there was a sharper than anticipated increase in inflation due to a rise in a number of food items as well as a reversal in commodity prices. Expectations of a normal monsoon along with various supply management measures by the government, including the electronic agricultural market trading portal, should help to moderate food inflation. However the firming of commodity prices and the implementation of the 7th central pay commission could lead to an upside bias to inflation in the coming months.
The RBI suggested that there are signs of corporate performance improving, with Q4 earnings suggesting double digit growth in EBITDA levels for non-financial corporates. There is also an increase in capacity utilisation and in order books. Public investment, especially in roads and railways, is gaining strength, although continuing weakness in private investment is a concern. Finally, the services sector is showing signs of expansion getting broad based pointing to a firming recovery.
Exports have declined for the seventeenth consecutive month in US Dollar terms in spite of a modest increase in volumes. However imports also fell sharply with 25 items accounting for a share of 87 per cent of total imports reporting a decline. Accordingly the trade deficit narrowed and was less than half its level a year ago. Interestingly in the press conference, the RBI said that oil is in a “sweet spot” at a 40-50 dollar range, with remittances from the Gulf countries being protected to some extent and the low oil prices giving us a relatively low current account deficit. The RBI also noted that some of the spike in oil prices in recent months can be attributed to temporary phenomenon such as supply disruptions due to the fires in Canada.
The RBI has covered the requirements for maturing FCNR-B deposits in forward markets however it is concerned that the leveraged portion of those deposits may not be renewed. Therefore there could possibly be outflows of the order of $20 billion causing some pressure on the rupee due to dollar shortage. The reserve bank also stressed that the proposed move of systemic liquidity deficit to one close to neutrality would depend on market conditions and that it would not commit to a timeframe, but would be opportunistic in achieving its stated goal. The transmission of lending rates remains a work in progress, and better monetary transmission would help to support the revival in growth. The governments reform measures on small savings rates combined with the RBI’s moves on liquidity and the shift of banks to the marginal cost of lending framework should help lower lending rates in the economy and thus boost growth.
To sum up, the policy delivered as expected, with no rate cuts. What is very encouraging is signs of a pickup in growth across the economy, albeit from a low base. The rise in inflation is a worry, but with food being approximately 45 per cent of the inflation basket and the expectation of a good monsoon, we may see inflation moderate going forward.
The video of the RBI monetary policy press conference is below:
Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.