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MOSL: ECOSCOPE-Monsoon holds key to next policy rate action-The RBI sticks to its ‘neutral’ policy stance

​ECOSCOPE: Monsoon holds key to next policy rate action; The RBI sticks to its ‘neutral’ policy stance

In line with our expectation and market consensus, the Monetary Policy Committee (MPC) has decided to keep the interest rates unchanged in its policy meeting. The RBI has also maintained its neutral policy stance.

The MPC observed that the upmove in the consumer price index (CPI)-based inflation to 3.7% in February was a result of base effects, as food prices had bottomed out in the previous month. The MPC expects CPI to average 4.5% in 1HFY18 before hardening to 5% in 2HFY18 as below-normal monsoon and implementation of 7th CPC could exert pressure on headline inflation in the latter half of the year.

The Committee has projected GVA growth to 7.4% in FY18 from 6.7% in FY17 on account of rapid remonetization and the government’s budget proposals that would spruce up capital spending and rural demand.

The central bank reiterated its inflation target of 4%. However, even though inflation is expected to remain above its 4% target, we do not expect a rate hike until inflation remains below 5%. In fact, if monsoon turns out to be normal, there could well be a case of a rate cut later this year.