Monetary Policy - No surprises this time: AnandRathi Financial Services

Mr. Sujan Hajra(Chief Economist- AnandRathi Financial Services) on Monetary Policy - No surprises this time:

This time Governor Rajan did not surprise the market. As anticipated, the policy rate and reserve requirements were kept unchanged. The inflation target for Mar'17 has been upped slightly, to 5%, while the GDP growth figure for FY16 has been maintained at 7.4%. The GDP deflator and the WPI figures point to deflationary trends in the economy. Also, rural demand is subdued due to the uncertain rains, low MSPs and fear of another El Nino year. The RBI is likely to remain largely accommodative. Any further rate-cut is likel y to come only after Budget 2016.

Status quo maintained. No surprises in today's monetary policy meeting. As had been anticipated, the RBI left its policy rates unchanged. Neither were there any alterations to the reserve requirements. While it kept the GDP growth fore cast for FY16 unchanged at 7.4%, the inflation forecast has now been upped to 5% for Mar'17 (against the earlier target of 4.8% during Jan-Mar'17).

Assessment. We had expected the RBI to maintain the status quo since (1) the implementation of the Seventh Central Pay Commission would increase wages and rental inflation; (2) three bad cropping seasons and fear of another El Nino yea r might nudge up agricultural inflation; (3) consensus regarding a Fed rate hike this month; (4) the RBI wants the full transmission of the 125-bp rate-cut; lending rates have declined only by 60bps. Besides, headline inflation has been inching up for the past three months, contributed by the core and non-core.

Outlook. We see the CPI inflation hardening till Dec'15, before stabilising in the 4-5% range in FY17. While we feel that the 5% CPI inflation target for Mar'17 is attainable, there are a number of risks to this forecast. After the Sev enth Central Pay Commission, services inflation could turn worrisome because of the rise in wage and rental inflation; a sharp depreciation in the rupee can be triggered by the Fed rate hike; an unexpected rise in crude-oil prices.

Recommendation. With WPI inflation having fallen 10 percentage points in the last eight quarters and the Q2 FY16 GDP deflator now at -1.4%, the deflationary trends in the economy are quite evident. The rural economy remains in a soft spot. With the second consecutive year of poor monsoon rains, low agricultural production, low MSP growth and forecasts of another El Nino year, rural demand is holding back the overall growth story. Thus we feel that the RBI policy would yet largely be accommodative. We expect a 50-75bp rate cut in 2016; however, it is likely to come only after Budget 2016.

Source : Equity Bulls

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