RBI Policy Review

Dear All,

 

In the Mid Quarter Policy Review the Reserve Bank of India (RBI) has left key policy rates untouched. "The Reserve Bank had frontloaded the policy rate reduction in April with a cut of 50 basis points," RBI said in its policy statement. "Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures"

 

Monetary and Liquidity Measures:

 

Ø Cash Reserve Ratio (CRR): Retained at 4.75%

Ø Repo Rate: Retained at 8.0%.

Ø Reverse Repo Rate: Stands 100 bps lower to Repo rate at 7.0%.

Ø Bank Rate: Retained at 9.0%.

 

Our View:

 

·         We think that RBI wants to wait and watch the monsoon progress and access the full effect of Fuel & MSP price hikes on inflation.

·         RBI will keep evaluating the evolving growth-inflation dynamics. Future actions will depend on external and domestic developments that contribute to lowering inflation risks and hence RBI may keep status quo in rate cuts till inflation expectations moderate.

·         Taking all the domestic and global economic developments into consideration it is expected that 10 year GOI yields will be range bound between 8.00 to 8.25% in medium term as RBI has indicated that it will continue with OMOs as liquidity management tool which will support the bonds yields.

·         On the shorter end of the curve CD rates can inch higher and settle at 9.45-9.50% levels.

 

Market Reaction:

 

India's stocks, bonds and rupee dropped, reversing an earlier advance, after the central bank unexpectedly left interest rates unchanged.

 

Equity: The news of no cut in policy rate took the market by a negative surprise and market plunged more than 200 points after the policy review. Sensex in the expectations lead by rate cut was trading 150 points higher before the rate cut.

 

Debt: After the policy review, the yield on the government's 8.15% note due June 2022 climbed 8 basis points, the most for a benchmark 10-year bond since April 20, to 8.13% in Mumbai, according to the central bank's trading system.

 

The rupee slipped 0.4% to 55.69 against the dollar.

 

 

Please find attached the Policy Review Document.

 

(Source: Bloomberg, RBI.org.in, Moneycontrol.com)

 

Thanks and Regards 
 
Rohit Saxena

Phone No: 09899365905
Mail Id: simmi9sep@gmail.com