RBI Policy Review - Temporary Pause :: Edelweiss

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The RBI, in its bi-monthly monetary policy review, left the repo rate unchanged at 7.75% as expected. It reiterated that future moves will hinge on data pertaining to inflation and the government’s fiscal stance. Given that the second round effects of lower commodity prices are yet to kick in and the government’s strong commitment to fiscal consolidation path, we see minimal roadblocks to monetary easing going ahead. We expect easing to resume from April, by when the RBI would have clarity on incoming new series GDP and inflation data and also the fiscal stance. For the full year FY16, we maintain 100-125bps of rate easing.

Policy rates left unchanged as expected

In its bi-monthly policy review, the RBI left the key rates unchanged as expected.  The action is in line with the guidance in the policy document of January 15, where the RBI stated that “key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation…”. Given lack of data releases since then, the central bank decided to stay put. However, it did highlight that future policy moves will  be consistent with its stance of monetary easing.

On growth front, the RBI sounded cautious stating “growth expectations should be tempered as lead indicators such as tractor and motorcycle sales and slowing rural wage growth all point to subdued rural demand”. It  retained its FY15 growth forecast of 5.5% (old series) and projected 6.5% in FY16.

The RBI’s key monitorables: Fiscal stance, inflation

In its policy statement, the RBI reiterated that the incoming data on inflation and fiscal deficit are key to its actions going ahead. On the inflation front, we see limited risks as second round effects of lower commodity prices are yet to kick in. However, we would keenly watch the new CPI series data to be released on February 12. Large revisions in the same could alter the central bank’s view. On the fiscal front, the finance minister (FM) is confident of meeting the FY15 target of 4.1% of GDP, and even if the FY16 target is relaxed somewhat, it will only be done to create fiscal space for infrastructure spending, which would be disinflationary as it would reduce supply bottlenecks. Hence, we see minimal roadblocks to monetary easing going ahead. The question is how much?

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