View of Mr. Varun Goel, Head PMS, Karvy Stock Broking Ltd on RBI’s monetary policy

RBI Governor maintained the repo rate at 8% in today’s policy. Despite the recent cool-off in headline inflation numbers, the future trend remains unpredictable. RBI has maintained its target of headline CPI at 8% by January 2015 and 6% by January 2016. We expect RBI to maintain status quo for some time to achieve these objectives as a significant drop in inflation appears unlikely in the short term. Food and vegetable prices seem to have bottomed out and we expect some uptick in those items in the coming months.

GDP growth in the last three quarters has remained below 5%. The slowdown is expected to have continued in fourth quarter also. RBI has pegged FY15 GDP growth estimate 5.5% with downside risks. The expectations of weak monsoons this year might depress agricultural growth while industrial activity stays muted.

The steady narrowing of the trade deficit over the year has shrunk the current account deficit (CAD) to 0.9 per cent of GDP in Q3 of 2013-14. For the year as a whole, the CAD is expected to be about 2.0 per cent of GDP versus 4.8% last year. This puts India into a relatively comfortable position compared to other emerging market peers given the uncertain external environment.