The highlight of yesterday’s monetary policy is RBI leaving the growth projections unchanged for FY 18 at 6.7% thus implying unrealistically high growth rates of 7.0% and 7.8% in Q3 and Q4 respectively. On the other hand, they have revised the headline CPI estimate range up by just 10 bps. It is clear that RBI is mainly concerned with targeting inflation at a 4% level on a durable basis and will not cut the policy interest rates to promote growth at the expense of letting inflation shoot up. So, the only way that RBI would ease rates is if inflation surprises on the downside. If not, RBI could quite easily hike the repo rate without necessarily changing the stance from Neutral to Tightening.
The next important data before the February policy would be the November and December CPI prints and the Fiscal budget. RBI would very keenly watch out for any material fiscal slippages. Based on current macro data, we do expect the policy rates to be on hold in February as well.
Another important highlight of the policy announcements was that RBI has advised the Government in prioritising infusion of growth capital to those PSBs (Public Sector Banks) that have demonstrated conservation of capital and managed asset quality stress better. This selective and differentiated approach will also encourage the banks to use capital efficiently in the future. Our understanding of this likely capital infusion methodology has been the same and we eagerly await the Government’s announcements in this regard.