RBI Monetary Policy - From Hawk to Dove: Edelweiss

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In its fifth bi monthly monetary policy, the RBI left all policy rates unchanged, but with some dovish statements. The dovish stance by the RBI was well anticipated by the markets. The latest RBI policy statement indicated that the risks to the 2016 target of 6% inflation are now balanced, as opposed to having an upside risk in the previous policy. The main positive is the mention of a possibility of policy accommodation early next year, including outside the policy review cycle. This will bring a huge relief to debt laden corporates and the Government, who is focusing on supporting growth in the economy. The central bank governor seems to be worried about the slower pick-up in domestic economic growth and particularly about the slow pace of revival in the investment cycle. Therefore, he believes the same needs policy priority.

RBI- on inflation On the inflation front, the RBI seems to be relatively comfortable about their target of 8% in January 2015 and 6% in January 2016, as the CPI levels have been consistently below 6% over the last two months. The RBI also reduced its CPI forecast to 6% for March 2015 against 8% in January 2015. With the fall in crude oil and food prices, the central bank now believes the risk to the 6% CPI target now is evenly balanced. Although the lower inflation is partly favored by high base of last year, the same is expected to wear out from December onwards. Sustainably low CPI inflation prints post December will induce RBI to consider cutting the benchmark rates. Costlier cereals and pulses due to deficient monsoon and lower kharif production could be considered as a threat to the persistent fall in CPI.

RBI- on growth The RBI seems to be worried about the slower pick-up in growth in light of the tepid global economic recovery. As per the RBI policy statement, traction in domestic investment cycle is critical for a sustained acceleration in Indian economy over the medium term. But, even after significant Government efforts, low capacity utilization and slow pace of revival of stalled projects is worrisome and warrants policy priority. The projection for FY15 GDP growth remains unchanged at 5.5%.

RBI- on banks` & lending rate The RBI policy statement acknowledges the weak transmission of money market rates by banks into lending rates. Hence, it is possible that an initial cut in repo rate will have only a signaling effect for banks. However, once the repo rate is cut, the RBI will likely continue in that direction, providing banks with the confidence to cut their lending rates.