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By Ruma Dubey

As was widely expected, RBI maintained the status quo; there was no change in the interest rates. Yet, the RBI indicated there was so much to celebrate in this year! With elections coming next year, surely today’s policy reads like the report card of a very bright, A+ student, with no blips whatsoever on the horizon. It is complete sunshine with low prices and high growth. Hallelujah!!!

While all were expecting the RBI to adopt a more hawkish tone on inflation given the rising crude oil and onset of summer, where seasonally prices rise, RBI went completely bullish. It is dovish all the way, taking all my complete surprise with such a magnitude of change in its stance.

RBI, instead of hiking inflation targets, has lowered the targets for first half and has further lowered it for the second half.  At the same time, RBI has hiked the growth targets. Its like a win-win all around! The RBI expects normal monsoon and an effective food supply management to spur lead to this positive situation.

Like last time, this policy too there was one dissenting vote from Michael Patra, who has been voting for a 25 bps rate hike.

Thus with the inflation trajectory expected to go down, are we looking at no rate hikes at all in current year? RBI has assumed that food inflation will remain sanguine through the year, even in the summer months. Secondly, it has expected crude oil to remain capped at $68/barrel and thirdly, RBI expects increase in MSP to have no effect on the inflation. Second half excepting inflation to go down further currently seems too far-fetched as there are simply too many imponderables what with fiscal deficit and monsoon, harvest; all will have to be taken into consideration.

The market is naturally thrilled to bits and the bond markets are the happiest with yields showing a major fall – one of the main objectives of this dovish tone? The thing is, at the moment, we are not seeing any of this reflected on the ground situation, which is why it makes one wonder about this change of stance of RBI.

And yes, if you thought, given the crisis in the banking sector, RBI would have stated something to soothe the nerves, there was no word on the NPAs situation.

Highlights of the policy:

  • Policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6%
  • Reverse repo rate under the LAF remains at 5.75%
  • Marginal standing facility (MSF) rate and the Bank Rate at 6.25%
  • Projected CPI inflation for FY19 is revised to 4.7-5.1% in H1FY19 v/s 5.1-5.6% projected earlier and revised to 4.4% in H2FY19 v/s 4.5-4.6% estimated earlier.  This is including the HRA impact for central government employees, with risks tilted to the upside.
  • Excluding the impact of HRA revisions, CPI inflation is projected at 4.4-4.7% in H1FY19 and 4,4% in H2FY19.
  • GDP growth is projected to strengthen from 6.6 % in FY18 to 7.4% in FY19 - in the range of 7.3-7.4% in H1FY19 and 7.3-7.6% in H2FY19, with risks evenly balanced.
  • Spurt in GDP is based on assumption that there will be a revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January. Rising global demand is also expected to aid growth.
  • Bans all bitcoin trading; terms it as illegal.
  • Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Viral V. Acharya and Dr. Urjit R. Patel voted in favour of the monetary policy decision. Dr. Michael Debabrata Patra voted for an increase in the policy rate of 25 basis points.
  • The next meeting of the MPC is scheduled on June 5 and 6, 2018.

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