RBI Policy Quote by Ritesh Jain, CIO, Tata Asset Management

On Jun 2, 2015

Reserve Bank of India released their Bi-monthly Monetary Policy today. RBI reduced the policy repo rate under LAF by 25 bps from 7.50% to 7.25% (reverse repo rate and MSF rate adjusted accordingly downwards by 25 bps). In its assessment, RBI has recognised slow global growth, volatility in global financial markets, moderate domestic economic activity in Q1, damage to crop on account of unseasonal rains, sustained weakness in consumption spending, low Consumer Price Inflation, and rising fuel inflation.

RBI has also stated that though there are three key risks (i.e. probability of below-normal southwest monsoon, firming crude prices, and volatile external environment) which would recommend a conservative strategy, it has still cut rates to address the weak investment climate and need to reduce supply constraints. RBI has stated that going ahead, the policy move would be data dependent.

RBI has delivered 25 bps rate cut as expected by most of the market, we still feel that the commentary and forward guidance might not be to the liking of the market. Though the policy does not state anything to be overly worried about, the fact that the word “accommodative stance” has been dropped and policy has emphasised on risks to inflation, would lead to a more balanced view on policy. We believe that going ahead, RBI would act to cut rates as and when disinflationary trajectory provides space to do so.

Over the medium term, we believe the inflation would continue to come down, driven by continued thrust on policy reforms as well as active measures by government to control food supplies to counter potential weak monsoon. This would create space for monetary policy easing. It would take 3-6 months of time for risks as highlighted by RBI to play out, and hence we expect RBI to give another rate cut in last quarter of this FY. In the interim, we expect markets to remain range bound with negative bias in near term, but would gradually move towards positive side as risks unfold in 2nd half of FY16.