Credit Policy Review - June 2016


In line with consensus expectations RBI kept all rates unchanged in its credit policy review. Thus the repo rate stays at 6.5% while the reverse repo rate stays at 6% and the cash reserve ratio (CRR) also remains unchanged at 4% of net demand & time liabilities (NDTL).

The RBI has retained its GVA (Gross Value Added) growth projection for FY17 at 7.6%. The inflation projections given in the April ’16 policy statement have also been retained but with an upside bias. Retail inflation in April ’16 rose more than expected largely due to food prices and as per RBI, makes the future trajectory of inflation somewhat more uncertain. However, the expectations of normal monsoon and various supply management measures of the government should moderate unanticipated firming up of food prices.

In its forward guidance RBI has stated that “given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative. The Reserve Bank will monitor macro-economic and financial developments for any further scope for policy action.”

Source: Second Bi-monthly Policy Statement for the year 2016-17, RBI

 Conclusion and Outlook

The credit policy review today was along expected lines with RBI staying on hold until further clarity emerges on monsoon and its impact on food prices. RBI has reaffirmed that the stance of monetary policy will remain accommodative. Additionally, RBI will continue to provide liquidity as per the changes in its liquidity management framework wherein progressively the deficit in the system is being brought to a position closer to neutral.

The expectations of strong monsoon, low MSP hikes for kharif crops of 2016-17, continued reforms by the government and higher public capital expenditure to augment supply side capacity forms the basis for our positive view on inflation going forward. Additionally, continuing fiscal consolidation, and low current account deficit are also supportive of lower yields.

Comments

  1. aditiJuly 19, 2016 at 2:30 PM

    I learned very useful updates here. Traders should always keep themselves well updated with the market movement. For live updates follow epic research.

    ReplyDelete

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