Maintaining status quo, Reserve Bank of India (RBI) in its second bi-monthly review of this financial year held on Wednesday kept the repo rate unchanged at 6.25%. The apex bank in its monetary policy review has thus held onto the rates for the fourth time in a row.

Another key decision included lowering of statutory liquidity ratio (SLR) by 20 basis points to 20% effective from 24 June 2017.

Commenting on the existing inflation rates and drawing a parallel for the future, the central bank predicted inflation to rise to 3.5%-4.5% in the second half of the ongoing financial year, and for it to remain in the range of 2%-3.5% in the first half.

The repo rate is the rate at which banks borrow from the central bank while statutory liquidity ratio is the amount a liquid assets that a commercial bank has to maintain vis-à-vis demand and time liabilities.

Taking cognizance of the policy review, this is what the experts in debt markets had to comment:

“The statements from RBI is dovish. RBI has guided the CPI inflation to 3.5 -4.5 % for march 2017. Viral Acharya, the deputy governor has stated the data of CPI and GDP has surprised on the downside which could allow the RBI to follow an accommodative stance if the data persists. The market may expect RBI to cut rates in the coming policy,” said Murthy Nagarajan, Head Fixed Income, Tata Asset Management.

“We maintain that the RBI will likely remain on a pause as it continues to watch out for the evolving inflationary conditions. We believe that a case for a rate cut will be strengthened with downside surprise to the RBI’s 2HFY18 inflation expectations. The RBI acknowledged that the inflation trajectory is much softer than the earlier estimates. While it maintains a cautious note, it clearly expects inflation to glide down towards the 4% mark by March 2018 based on current dynamics. We believe that the tone of the communique was much less hawkish than the April policy but do not expect any immediate cut in the repo rate,” Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities.

“That the RBI would leave the Repo rate unchanged at 6.25% was expected, but what we were looking for was its assessment of future inflation and for a divergence in the views of the Monetary Policy Committee (MPC) members. We seem to have got both, the RBI has lowered its inflation projection for FY 18 taking into account recent inflation data. As also for the first time the MPC voted 5-1 to hold rates, which means that one member possibly voted for a rate cut. This does open up the scope for a rate cut in the August policy, if monsoon progresses as expected and if global conditions continue to remain favorable,” said Arvind Chari, fund management, Quantum MF.

“In an expected move, MPC has maintained status quo on repo rate and continue to retain neutral stance. The policy statement is dovish with hints on accommodation in future. One of the MPC members has dissented the policy move.

RBI has adapted to stay put amid current disinflationary developments in the economy. The recent sharp drop in food inflation has blurred the medium term projections on prices. RBI has reduced its inflation forecast by more than 100bps for FY18 and sees year end inflation to be in the range of 3.5-4.5% from the earlier projections of 4.5-5.00%.

MPC has cut estimates on growth for FY 18 at 7.3% from 7.40%. RBI believes restoring banking system health and moderation in small savings rate precedes any accommodations from policy rate sides.

We believe RBI can ease rates by 25bps with a room for one more cut if the current disinflationary forces persists. The positive outlook on monsoon, stable exchange rate & moderate international oil prices should pave the way for such an outcome.

Bond markets will take the dovish guidance positively and yields should drift lower, we see 10y bond yields to trade within 6.40-6.70% band in the near term. High real rates will keep bond markets attractive for a while,” Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance Limited.

“It has been a balanced policy wherein the RBI has addressed the fluctuations in inflation and has indicated that if such trends continue there is a probability of a spike in inflation in the second half of the fical. Also, the reduction in CLR has to correspond with a cut in HTM only to bring both under the same umbrella,” said Sudhir Agarwal, fund manager and executive vice president, UTI mutual funds.

rounak@outlookindia.com