Published on 5/10/2017 5:17:09 PM | Source: Choice Broking
RBI Monetary Policy : October`2017 - Choice Broking
RBI’s Key Policy Decisions:
* Policy repo rate under the liquidity adjustment facility (LAF) kept unchanged at 6.0%
* Consequently, the reverse repo rate under the LAF remains at 5.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25%. However, the RBI reduced the Statutory Liquidity Ratio (SLR) requirement of banks’ by 50 bps to 19.5% of NDTL with effect of October 14.
In line with the expectation, the Reserve Bank of India (RBI), in its fourth bi-monthly monetary policy statement’ 2017-18, kept the policy rate unchanged at 6.0%. Considering the increasing upside risks to inflation, the RBI also maintained its neutral monetary policy stance in consonance with objective of achieving the medium term CPI inflation target at 4%(+2/-2).
Five members of MPC voted for ‘status quo’ and one for 25 bps rate cut.
Takeaways from Monetary Policy Committee (MPC) commentary:
MPC’s view on inflation
Inflation rose to 5-month high at 3.4% in August mainly due to increase in prices of food articles which have been declining over the past three months. The MPC highlighted that headline inflation so far this fiscal remained broadly in line with projection, however extent of increase in core inflation has been slightly higher than expectations. As per the September 2017 round of the Reserve Bank’s survey, proportion of respondents expecting the general price level to increase by more than the current rate rose markedly for the three-month as well as one-year ahead horizons.
Uneven geographical spread of monsoon has impacted the kharif crop sowing and first advances estimate pointed to a decline in crop production compared to year ago period thus posing some uncertainty in food prices going forward. Despite this, MPC expects stable food price outlook amidst view that adequate food stocks and effective supply management by the Government may keep food inflation under control. Balance of risks to the inflation trajectory is broadly on the upside and can come from a shortfall in the summer crop production, farm loan waivers by states, possible fiscal stimulus by the center, further strengthen of crude oil prices and the implementation of higher pay and allowances by state governments. During the first five months of this fiscal, average inflation rate remained at 2.5% and MPC expected CPI inflation to rise to 4.2-4.6% in the second half of this year.
GVA growth forecast revises down to 6.7% for FY18 from 7.3% projected earlier
As per the MPC, loss of economic activity during Q1FY18 and expected decline in Kharif crop production are early setbacks that impart downside to economic outlook. The implementation of GST has impacted the manufacturing sector adversely during Q1FY18 and is likely to weigh on manufacturing activities in the short term which in turn is likely to further delay the revival of investment activities in the economy. Sharper increase in imports relative to exports due to increase in crude oil prices and gold imports resulted in a widening of the current account deficit (CAD) in Q1FY18, even as net services exports and remittances picked up. However, the RBI is expecting improvement in economic activity in coming quarters as reflecting by high frequency indicators such as strong vehicle sales growth & uptick in freight traffic as well as manufacturing PMI.
Economy will return to its potential growth levels by Q3 and momentum is likely to improve over Q4. As per the RBI’s consumer confidence and overall business assessment of the manufacturing and services sectors survey, firms expect a significant improvement in business sentiment in Q3. Business sentiments also improved on the back of various government initiatives and during Q1FY18, net foreign direct investment (FDI) grew by 24% at US$10.6 bn and foreign exchange reserves reached at US$399.7 bn by September 29,2017. The RBI revised its GVA growth projection to 6.7% for FY18 from 7.3% forecast earlier. According to the MPC, various structural reforms introduced in the recent period are likely to augment growth over the medium-to-long-term by improving the business environment, enhancing transparency and increasing formalisation of the economy.
The MPC expressed the need to reinvigorate investment activity which in turn would revive the demand for bank credit by industry as existing capacities get utilized and the requirements of new capacity open up to be financed. In addition to this, the MPC also expressed other measures which can support economic growth such as 1) concerted drive to close the severe infrastructure gap, 2) restarting stalled investment projects particularly in the public sector, 3) enhancing ease of doing business, including by further simplification of the GST; and 4) ensuring faster rollout of the affordable housing program with time-bound single-window clearances and rationalisation of excessively high stamp duties by states.
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