This quarter’s credit policy review has come close on the heels of Union Budget 2017. Both equity and bond markets had reacted positively to the Budget thanks to the lack of negative news on the whole. After that the focus shifted to the monetary policy, with many analysts and market participants expecting the last 25 basis point (bps) rate cut for this financial year. The finance minister had stuck to the fiscal consolidation path with a deficit target of 3.2% for 2017-18. Low fiscal deficit gives some room for a rate cut. One basis point is one-hundredth of a percentage point.
The other side of the argument focused on both domestic and global policy uncertainties and the need to have room to manoeuvre rather than rushing into a rate cut. The latter has prevailed as the Reserve Bank of India (RBI) not only chose to keep rates unchanged but also shifted the policy stance from accommodative to neutral. An accommodative stance suggests that there is room for further cuts in interest rates, while neutral means that the current level of repo rate would prevail for some time.
