RBI keeps policy rate on hold, may cut rates in future by 25-50 bps - ANZ

The Reserve Bank of India kept its repo and reverse repo rates on hold earlier today during its meeting as expected, suggesting that there was no change in the policy rate corridor. Amongst the six monetary policy committee members, five voted to keep the rate on hold, contrasting the unanimous decision in the earlier review.

The RBI partly relinquished its hawkish stance acknowledging the weak CPI print as well as the abatement of risks to inflation. The deceleration of GDP growth to 6.1 percent year-on-year in the fourth quarter of FY2017 also appears to have been a consideration.

The drop of risks to inflation has arisen from three developments – the increasing possibility of a near normal monsoon, modest accretion to inflation from the impending implementation of the Goods and Services Tax and weaker commodity prices amidst currency stability, noted ANZ in a research report.

However, the RBI seems to be uncertain regarding the sustainability of recent low inflation figures. Offsetting the favourable developments is a possible strengthening of demand following the remonetisation of the economy, the effect of a rise in the housing allowance for civil servants, rising rural wages and the risk of fiscal slippages with the announcements of farm loan waivers. But these risks are not new and have been underlined by the RBI in earlier policy statements.

The central bank, based on these developments, has cut its FY2018 CPI forecast for H1 FY2017 to 2 percent to 3.5 percent and for the second half to 3.5 percent to 4.5 percent. The monetary policy is expected to become more data dependent than in the past, noted ANZ in a research report. If the monsoons come out to be normal as is now being projected, modest easing of 25 to 50 basis points is likely, added ANZ.