In the Fifth Bi-Monthly Monetary Policy Statement 2017-18 held today, the RBI decided to maintain status quo on the policy rates. The monetary policy stance continues to be neutral with a hawkish outlook on inflation and future growth prospects.
Inflation estimates have been revised upwards in the range of 4.3 to 4.7 percent range for Q3 and Q4 of FY18
- Moderation in inflation excluding food and fuel observed in Q1 FY18 has been reversed. This upward trajectory can continue in the near term.
- Impact of HRA by the Central Government is expected to peak in December. The increase in HRA by state governments may push up housing inflation in 2018.
- The recent rise in international crude oil prices may sustain, especially on account of OPEC's decision to maintain production cuts through next year.
- However, increase in inflation can be limited in the near months due to the expected seasonal moderation in vegetable prices on account of the arrival of winter and the recent decision of the GST council to bring several retail goods and services to lower tax brackets which will in turn lead to lower retail prices.
GDP and GVA
The projection of real GVA growth for 2017-18 has been retained at 6.7 percent.
- The recent increase in oil prices may have a negative impact on margins of firms and GVA growth.
- Shortfalls in kharif production and rabi sowing, pose downside risks to the outlook for agriculture.
Positives for GVA Growth
- Credit growth has seen some improvement in recent months. Recapitalisation of public sector banks should contribute positively to this.
- Although there has been weakness in some components of the services sector such as real estate, the RBI's survey indicates that the services and infrastructure sectors are expecting an improvement in demand, financial conditions and the overall business situation in Q4.
MPC decides to maintain status Quo and a neutral policy stance
- Food and fuel inflation has moved up in November.
- Rising input cost conditions means that there is higher risk of this being passed onto retail prices in the near term.
- Fiscal slippages on account of implementation of farm loan waivers by select state governments, partial roll-back of excise duty and VAT in the case of petroleum products and the reduction in GST rates for several goods and services has led to decrease in revenue.
- Global financial instability on account of uncertainty over monetary policy normalisation in Advanced Economies and fiscal expansion in the US.
In the last monetary policy review held in October 2017, RBI continued to have serious concerns about the stagnating investment activity in the economy. Its statement was:
"The MPC reiterated that it is imperative to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities get utilised and the requirements of new capacity open up to be financed. Recapitalising public sector banks adequately will ensure that credit flows to the productive sectors are not impeded and growth impulses not restrained. In addition, the following measures could be undertaken to support growth and achieve a faster closure of the output gap: a concerted drive to close the severe infrastructure gap; restarting stalled investment projects, particularly in the public sector; enhancing ease of doing business, including by further simplification of the GST; and ensuring faster rollout of the affordable housing program with time-bound single-window clearances and rationalisation of excessively high stamp duties by states."
It seems like the GOI had acted on the concerns of the RBI and the policy document clearly reflects the Central Bank's views that the recent reforms unleashed by the GOI will have a positive impact on the growth prospects in the near future.
Positive Triggers for the Economy
- Increase in capital raised from the primary market after several years of sluggish activity.
- Improvement in the ease of doing business ranking should help sustain foreign direct investment in the economy.
- Large distressed borrowers are being referenced to the Insolvency and Bankruptcy Code (IBC).
- Recapitalization of PSU banks is expected to enhance allocative efficiency.
The note ended with the RBI clearly stating that the impact of the above measures should be the reduction in domestic borrowing costs through improved transmission of lower rates by banks on outstanding loans.
The policy tone continues to be hawkish with concerns of inflation moving in the northward direction. However, RBI seems to be satisfied with the recent measures undertaken by the GOI to boost growth prospects of the economy in the near future. We continue to advise short term funds across risk profiles with a status quo on the recommendation that our aggressive and moderately aggressive investors can continue to take exposure into dynamic bond funds.