Future rate cuts will depend on food prices and monsoon.
As expected by market participants, the RBI today in its bi-monthly policy meet kept key rates unchanged. The repo rate and reverse repo rate remain unchanged at 7.50% and 6.50% respectively. The cash reserve ratio (CRR) has also been kept unchanged at 4%.
The retail
inflation measured by the revised consumer price index (CPI) firmed up for the
third successive month in February as favourable base effects dissipated. The
central bank said that lending rates of banks have not declined despite two rate
cuts and low credit take off and future rate cuts will depend on food prices and
monsoon.
“Status
quo in the monetary policy was on the expected lines. The central banker
is taking a nuanced stance towards policy here. The inflation projections are
optimistic; yet, the RBI is waiting to study additional inflation data so as to
verify the impact of recent seasonal anomalies on supply. The central
banker’s emphasis on rate transmission in the banking system may be indicative
that, amongst other things, gradual liquidity easing may be possible. Going
forward, the outlook on monsoon would be the key signal directing the policy,” said
Lakshmi Iyer, Chief Investment Officer (Debt) & Head, Products, Kotak
Mutual Fund.
The Monetary Policy Framework Agreement signed by the Government of India and the Reserve Bank in February 2015 will shape the stance of monetary policy in 2015-16 and succeeding years, RBI said. The central bank has projected CPI inflation at 6% by January 2016 and at 4% by the end of 2017-18.
“The monetary policy is very much on expected lines, with no surprise measures. RBI, though maintaining an accommodative stance, has clearly mentioned it is still awaiting transmission of its front-loaded rate cuts. We believe RBI would maintain its accommodative stance going forward and expect 50 bps repo rate cuts in FY16,” said Pankaj Jain, Senior Fund Manager, Fixed Income, Principal PnB Asset Management Co.