Jun 7, 2017

Franklin Templeton note on today's RBI Monetary Policy Review

The RBI announced its second monetary policy review for the financial year 2017-18 today. The Monetary Policy Committee (MPC) decided to keep the key policy rates unchanged. This was consistent with a neutral stance of the monetary policy. Please click here to download our monetary policy analysis and outlook. I am appending a few key highlights from our note for your reference -
  1. Key Rates - RBI kept the Repo rate unchanged at 6.25%. However, the central bank cut the statutory liquidity ratio (SLR) to 20% from 20.5% in order to provide banks with greater flexibility to meet higher liquidity coverage ratio (LCR) of 100% (currently 80%), which will come into effect from January 2019.

  2. Growth Forecast - The projection of real GVA growth for 2017-18 has been revised 10 bps downwards from April 2017 projection to 7.3%, with risks evenly balanced. 

  3. Inflation - Headline inflation is projected in the range of 2.0%-3.5% in the first half of the year and 3.5%-4.5% in the second half. We believe inflation is likely to surprise on the downside, leaving room for an interest rate cut.

  4. Yield Curve - The tone of RBI's policy was perceived to be dovish, as a result bond prices moved up today. On current valuation, the medium to long term segment of the g-sec yield curve looks attractive. 

  5. Our Outlook - The central bank reinstated that it would "see through" inflation prints for the next couple of months before taking any action. Going ahead any action on the rate front will be a function of a downside surprise to RBI's inflation estimates and data on underlying inflation pressures. Hence, we expect a 25 bps rate cut in the near term.

  6. Investment Strategy - We remain bullish on the medium duration segment and recommend investors (who can withstand volatility) to consider duration bond / gilt funds for medium term. Meanwhile, improvement in the credit environment coupled with the existing liquidity surplus may continue to augur well for the shorter end of the yield curve. Hence, we continue to remain positive on corporate bonds and accrual strategies.

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