Comments from Sahil Kapoor, Chief Market Strategist, Edelweiss Financial Services on RBI Credit Policy

Comments from Sahil Kapoor, Chief Market Strategist, Edelweiss Financial Services on RBI Credit policy:

The Reserve Bank of India adopted a slightly dovish stance than its last policy meeting and indicated continuation of accommodative monetary policy. Inflation projections for January-March 2016 were lowered by 20 bps with risks to inflation target of 6% by January 2016 are broadly balanced. The reserve bank acknowledged that higher reservoir levels and expansion in Kharif sowing has allayed apprehension of below normal monsoon. Significant fall in Crude Oil prices, government’s supply management to keep food prices stable and near normal monsoon for rest of the season would continue to have mitigating effect on inflation.

However, RBI highlighted the following reasons which prompted it to stick to its earlier stance on benchmark policy rates:

1. Transmission of policy rates continues to be a key driver of monetary policy. The central bank expects that continued easy liquidity conditions, a probable pick up in loan demand and PSU banks recapitalization would enhance policy transmission and lead to lower borrowing rates. 

2. Rise in CPI in the month of June despite a high base effect is a source of caution. RBI indicated that hardening of inflation excluding food and fuel is the “most worrisome” risk to inflation. The full effects of service tax increase, rising food prices, corporate staff costs and upward pressure on personal care segments are the key risks highlighted by RBI.

3. Further policy action from RBI will be dependent on how the above inflation indicators play out along with the degree of decline in inflation for July and August due to base effect and a sharp fall in Crude Oil prices.

4. The probability of an interest rate hike in US is going to influence monetary policy in India. For this the RBI clearly remains cautious of adverse global shocks and has indicated its focus on building adequate forex reserves.

5. Continuation of policy efforts by government to unclog supply side and boost infrastructure spending.

As per our assessment the RBI’s latest monetary policy appears just a tad dovish than its earlier stance. The easing of global risks emanating through Greece and China along with a significant decline in Crude Oil prices have prompted RBI to continue with its accommodative tone. The central bank has acknowledged softening of most of the concerns highlighted in its June monetary policy. However, the Reserve Bank is watching the inflation trajectory closely especially the behaviour of inflation at the consumer level once the high base effect subsides from September onwards.

The market consensus was that of a no change in repo rate in this policy. However the current assessment and rationale from RBI is indicative of softer rates going forward as most drivers continue to get aligned. Equity markets would face short term selling pressure as further easing gets pushed forward to the next quarter. The benchmark indices have remained largely unchanged between the June and August RBI policy meetings but could have an upside bias after a bout of volatility for the next few days.