MPC Meet: October 2018

Friday, October 5th, 2018

A few notes from the MPC statement and press conference today.


But first, a quick recap of the previous August policy and guidance:

In the August meeting, the MPC was of the view that domestic growth momentum was strong and that the output gap was closing. However rising trade protectionism, geo-political tensions and elevated oil prices posed risks to near term and long-term global growth prospects. Additionally, the MPC was of the view that uncertainty around inflation needed to be monitored even after accounting for MSP hikes and elevated crude prices. Keeping these factors in mind, the MPC increased the repo rate by 25 basis points to 6.5 per cent and kept their stance as neutral.


What has happened since the last policy decision:

The last inflation print came in at 3.69 per cent which is below the target inflation of 4 per cent and lower than the MPC’s own target of 4.8 per cent. However between the policies, oil has moved from roughly 70 dollars per barrel to over 85 dollars a barrel. The rupee has also depreciated substantially to over 73 rupees to the dollar. both of these factors could create substantial upside risks to the inflation outlook going forward. In addition, bond yields have moved up sharply and liquidity in the credit markets have tightened with issuances drying up.



Notes from the latest policy statement and press conference:

The policy statement kept the repo rate unchanged but changed its stance to one of calibrated tightening. The RBI governor mentioned that the outlook was overcast with downside risks to global growth and trade. This is due to various factors including country specific emerging market events that have a spill over effect on portfolio flows, global tapering of quantitative easing as well as a normalisation of the monetary policy stance and continuing tariff wars affecting global trade.

Domestically, there is a sequential acceleration of GDP growth, with manufacturing and agriculture in particular doing well. However, the services sector performance has been mixed. Consequently, the GDP print of Q1:2018-19 was significantly higher than that projected in the August resolution.

Inflation outcomes were actually below projections. This was driven by expectations that food inflation would to remain benign. The crude oil rally however would pose upside risks.

In terms of fund flows, FPIs have been net sellers in both equity and debt, whilst net FDI has been positive. Additionally, Rupee depreciation has been moderate compared to its emerging market peers. The RBI governor mentioned that real effective returns on currency has been about 5 per cent.

The MPC noted that global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions posed substantial risks to the growth and inflation outlook. It is therefore imperative to further strengthen domestic macroeconomic fundamentals.

Urjit Patel mentioned that this could be done in the following way:

  1. maintaining inflation credibility via the monetary policy framework
  2. sticking to fiscal deficit targets at general government level
  3. allowing flexible exchange rate adjustment without undue volatility
  4. retaining adequate liquidity and capital buffers to maintain financial stability particularly in light of the fact that retail credit growth is growing faster than nominal GDP growth
  5. undertaking further structural reforms, and
  6. liberalising capital flows, including FDI

The RBI also had a short note on the current crisis in NBFCs. They mentioned that the RBI, SEBI and the government were monitoring the situation closely. They mentioned that the Asset liability mismatch from NBFC’s due to over-reliance on CP for lower marginal cost of funds. And that a better model would be to rely on equity funding to better match liabilities.

Finally, Urjit Patel mentioned that assumptions on exchange rate and slippage in fiscal deficit were already baked into inflation projections. The MPC has already raised rates twice this year and a change in stance means that rate cut is off the table. Now the two options would be either rate hike or neutral.

About the author

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.

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