Inflation targeting is no longer the sole objective of India’s monetary policy but shares the centre stage with Growth. Dr. Patel’s stated primary objective of the monetary policy is “to maintain price stability while aiming for growth”. A cut in repo rate signifies this change. The downward revision of neutral / real rate between 1-year treasury bill (risk-free rate) and expected consumer price inflation (CPI) to 125 bps from a band of 150-200 bps is quite significant since it provides additional room for one more rate cut in this financial year. Also, the neutral rate band is also set to fall in line with international markets, particularly when the global growth outlook is getting revised downwards.
We expect the new Governor to be more tolerant of CPI inching up than his predecessor. Whilst the new comfort zone for the future CPI prints is 4 to 6 percent, RBI expects inflation to be around 4.5%. Since expect the neutral or real rate to continue to falling in line with the situation in advanced economies, the scope for more Repo rate cuts has increased. This augurs well for both INR bonds and financial equities - the two areas our firm is focussed on.