• The Monetary Policy Committee (MPC) today announced a 25 basis points (bps) reduction in the policy rates (repo rate is down to 6%, the reverse repo rate to 5.75%, and marginal standing facility rate to 6.25%). Four out of six members were in favour of the decision, while one voted for a 50 bps cut and another for status quo.
• The MPC maintained its neutral monetary policy stance, but is now more comfortable with the inflation trajectory since several upside risks have reduced or not materialised.
• The MPC’s fiscal 2018 forecasts on gross value added (GVA) growth and consumer price inflation (CPI) are retained at 7.3% and ~3.5% average, respectively. The MPC reiterated its focus to maintain medium-term inflation at 4%. 
  

Our view

The policy rate cut was in line with our expectation. In our view, the timing was opportune since inflation has dipped to record lows and is only likely to rise gradually hereon. For the first quarter of fiscal 2018, CPI averaged 2.2%, which is closer to the lower bound of the MPC’s forecast (2-3.5%) for the first half of the year. For the second half, the MPC forecasts inflation around 3.5-4.5%. Despite a rate cut, the MPC’s policy stance has been kept neutral given the expected uptick in inflation.

We do not expect any further reduction in the repo rate this fiscal.
 

The MPC maintained its neutral monetary policy stance but is now more comfortable with the inflation trajectory since several upside risks have reduced or not materialised. The recent dip in inflation was accentuated by a demonetisation-led crimp in demand and seasonal downside pressures on food, most of which are temporary and will soon fade. What is comforting is that beyond this noise, there are other factors that will act as bigger curbs. These are; (i) normal monsoon, which will keep food inflation in control; (ii) benign global oil and commodity prices, which along with a strong rupee, will keep imported inflation in check; and, (iii) only a moderate pick-up in domestic demand, which will keep the pressure on core inflation muted.