Decoding the RBI Monetary Policy

On Tuesday, the six-member Monetary Policy Committee, led by Reserve Bank of India Governor Shaktikanta Das, began deliberations on the bi-monthly policy review.

Here are the Key Highlights:

· Contrary to majority expectations, RBI kept all policy rates unchanged.

· Central Bank will continue to maintain an accommodative stance as long as necessary.

· Accent has been to support growth which is still facing some challenges.

· Headline inflation to peak in Q4 this year and inflation outlook provides comfort; however hardening global crude prices poses upside risk.

· Full-year inflation for FY21-22 seen at 5.3%

· Full-year inflation for FY 22-23 seen at 4.5%

· GDP for FY22-23 is projected at 7.8%.

· RBI Maintains a flexible approach for managing liquidity as per evolving situations.

· Says external sector is stably anchored by high FX reserves.

· Current account deficit is likely to be contained well below 2% of GDP in this financial year and capital flows will comfortably finance the same.

· RBI will focus on smooth completion of the Government borrowing program.

· The Central Bank will insulate the domestic economy, market from spillovers.

· Enhances limit for investments under voluntary retention scheme by 1 trillion rupees.

· Indian banks will be allowed in offshore OIS Market.

OUR TAKE: The policy is as dovish as anyone would have expected. The sharp scaling down of inflation projections would justify the dovish stance and unchanged rates. But inflation projection may be looked at with skepticism in view of the global price trends from which we are not insulated Growth projection is slightly downgraded which justifies a supportive stance.

RBI decisions are not influenced by global monetary developments as many expect and as observed in earlier cycles.

For the Rupee, the policy looks neutral in the short term, governed by flows but possibly some weakness in the medium term. It is unlikely that the market would speculatively weaken the rupee looking at the large FX reserves position. Broadly, the rupee should be moving in line with the Dollar Index, trade deficit/current account deficit trends and global investor flows. We would like to wait and see the trend of flows in view of the sharply tightening global financial conditions. Our forecast range for the current month is 74.50-75.50 for USDINR.

The policy is supportive for equities and short term bond markets, Long End Yields will be driven more demand and supply

Prepared By,

Jayaram Krishnamurthy, Co-Founder & COO, Almus Risk Consulting.