In the Third Monetary Policy Statement, 2017-18, the Monetary Policy Committee (MPC) cut the policy rate by 25 basis points in line with market expectations continuing to maintain a neutral stance on monetary policy. The reason for the easing in the policy rate today was on account of the fact that the upside risks to inflation had either reduced or not materialised due to the following:
(1) The baseline path of headline inflation excluding the HRA impact has fallen below the projection made in June to a little above 4% by Q4
(2) Inflation excluding food and fuel has fallen significantly over the past three months and
(3) The roll-out of the GST has been smooth and the monsoon has been normal
However, the MPC continued to be neutral as far as the policy stance is concerned because they still believe that inflation is going to show an upward movement from here.
Although RBI's decision to cut the policy rate was a welcome step, the tone in the document was hawkish. The MPC had concerns on the inflation front on account of (1) the implementation of farm loan waivers by States which could lead to fiscal slippages; (2) implementation of States salary and allowances which has not been factored into the inflation projection as there is a lack of clarity on the timing; and (3) high frequency indicators which are suggesting that price pressures are building up in vegetables and animal proteins in the near months.
The MPC also talked about some of the positives which could keep inflation under check in the coming months. The successful normal monsoon along with effective food management which has the capability of moderating food inflation, continuation of the general moderation of price increases in CPI excluding food and fuel and the stability in the international commodity prices can keep the inflation on a downward trajectory.
A quick reading of the document also shows that the MPC was very vocal about the need to increase the flow of credit to productive sectors. The committee was of the view that there is an urgent need to spur private investment, remove bottlenecks in the infrastructure sector and focus on the Pradhan Mantri Awas Yojana for housing needs of all. It was clearly mentioned that the RBI and the Government are working together to resolve the stressed corporate borrowers and recapitalise the public sector banks within the fiscal deficit target.
We maintain status quo on our recommendations in the fixed income space. We continue to recomemend short term funds to our Investors who have a time horizon of 1-3 years. On the other hand our moderately aggressive and aggressive investors can still take exposure into dynamic bond funds.