Monetary policy reaction - Pankaj Sharma, CIO - Fixed Income, DSP Blackrock Mutual Fund

Interest rate cycle to remain in neutral mode

The outcome of the policy is in lines with market expectations and hence it's understandable that the immediate reaction is relatively muted. The rate cut comes on the back of a reduction in the upside risks to inflation, opening up a case for monetary policy accommodation. The Monetary Policy Committee (MPC) has acknowledged that the trajectory of inflation would rise from the current lows, leading to continuation of a neutral stance whilst maintaining its commitment to keep headline inflation close to 4% on a sustained basis.

That said, the forward looking communique indicates MPC to be in a data dependent mode MPC expects upside risks for inflation to be contained owing to normal monsoon, food and fuel prices being under check. MPC has leveraged this comfort on inflation to boost private investment and remove infrastructure bottle necks. Risks to inflation have been predominantly assigned to the implementation of pay commission by states in the same form as that of centre.

We take comfort from the fact that the MPC highlights the limits on raising market borrowings by states whilst additional expenditure would be met by raising taxes and curtailing expenditure further dampening capex cycle. We expect the states to implement pay commission in a staggered manner whilst the adverse impact on growth looks more imminent as we are yet to fully come out of impact of structural events; viz demonetization and GST. This adds further comfort for the interest rate cycle to remain in a neutral mode with an outside chance of further easing before April'18 policy.

The MPC policy decision would further strengthen macro stability as we strive to optimise the growth - inflation dynamics; and not leverage one at the cost of other. This augurs well for the domestic financial markets reinforcing the India growth story.

Source : Equity Bulls

Keywords