Growth Assumes Centricity Together With Price Stability

Inflation targeting is no longer the sole objective of India’s monetary policy but shares the centre stage with Growth. To be explicit, the primary objective of the monetary policy is “to maintain price stability while keeping in mind the objective of growth”. A cut in repo rate signifies this change. Today’s policy statement is also quite comforting as it begins by mentioning that “the inflation outlook has improved”. The unanimity amongst the members of the MPC in going with a cut in repo rate echoes this confidence that the inflation expectations at RBI’s end are subdued. We had recently emphasised the “interest rate softening bias” of the external members of the MPC by analysing some of their published research.

Another distinct change is in the way RBI has revised downwards the neutral or real rate between 1 year treasury bill (risk free rate) and expected CPI from a band of 150- 200 bps to now 125-150 bps. This is quite significant as this provides an additional room for one more rate cut in the current financial year. In addition, the neutral rate band is also set to fall in line with the international markets particularly when the global growth outlook is getting revised downwards.

RBI is also maintaining its neutral to surplus liquidity stance which is very helpful in enabling the transmission of policy rate cuts in money market yields and in the borrowing costs for highly rated corporates.

To conclude, today’s monetary policy announcement is quite positive for both the bond markets and financial stocks.


Nikhil Johri

Nikhil Johri
Founder & Chief Investment Officer