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RBI Monetary Policy | Quote from , Tata Capital & Emkay Global Financial Services

RBI Monetary Policy | Quote from Govind Sankaranarayanan, Tata Capital

RBI Monetary Policy | Quote from , Tata Capital & Emkay Global Financial Services

Quote from Govind Sankaranarayanan, Chief Operating Officer of Retail Business & Housing Finance, Tata Capital today’s monetary policy.

“Given the recent favourable macroeconomic conditions, the RBI has understandably maintained its position and stayed firm on our expectation in terms of interest rates. The neutral stance can also be attributed to stable commodity and oil prices, expectations of a normal monsoon, a favourable GST and the overall strengthening of the rupee, which has eased the overall inflation. Despite the announcement, we believe that the recent rate cuts by financial institutions will benefit customers and positively impact sectors like auto, white goods and housing.”

RBI Policy | Dhananjay Sinha, Head of Research, Economist & Strategist at Emkay Global Financial Services Limited

Inputs by Mr. Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global Financial Services Limited.

RBI maintains status quo with no change in stance
·         RBI has revised CPI inflation downwards to 2.0-3.5% range in H1FY18 and 3.5-4.5% in H2FY18 as compared to earlier projections of an average 4.5% in H1FY18 and 5% in H2FY18.
·         The central bank also reiterated that the impact of demonetization is transitory both on inflation and growth. As per the revised GVA data growth slowdown was visible since Q1FY17 and got further accentuated in Q4 due to demonetization. Hence, GVA has been revised downwards by 10bps to 7.3% in FY18
·         Going forward, while both global and domestic impulses forebode cyclical growth recovery, rising input inflation and wage pressures might drag GVA growth
·         82.6% of the currency has been remonetized. With remonetization RBI believes inflationary risk will start rising and cash intensive sectors in the economy will start picking up

Notwithstanding the downwards revision in the inflation projections, RBI believes that the recent downside surprises in inflation were transitory in nature. Recent decline in CPI inflation to 3% is attributable to factors such as lingering demonetization impact, especially on vegetable prices, supply glut in pulses due to bumper production & imports and decline in global commodity prices. However, there are several counterbalancing factors that could resuscitate inflationary pressures such as a) strengthening in consumption demand, b) rising pace of rural wage growth, c) higher government spending including through lager scale farm loan waivers & 7th pay commission, d) remonetisation and e) rebound in global commodity prices. Overall, RBI’s outlook on growth is constructive, flowing from better domestic demand and upturn in global growth. In the near term strengthening of global growth is likely to play a critical role in supporting domestic growth.

These dynamic factors have led RBI to retain its status quo on policy rates and stance. Incremental data on demand and price movements will condition its future action. But at this juncture RBI believes, that change of stance in response to transitory decline in inflation could be inconsistent as it will impel abrupt action later, thereby cause loss of credibility.