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The first monetary policy review under the new Governor Shaktikanta Das did not disappoint the street. The MPC has reduced the repo rate by 25 basis points from 6.5 percent to 6.25 percent while changing the monetary policy stance from calibrated tightening to neutral. This is in sync with the medium term target for CPI of 4 percent within a band of +/- 2 percent while supporting growth.

Our observation in the Monthly Market Update-December 2018 issue was absolutely spot on. It stated, “We are of the view that Das, who is known to believe that all stakeholders should be consulted for policy making, might not be as hawkish as his predecessor. We therefore might see a change in his stance as far as the monetary stance is concerned”.

RBI’s views on Inflation and Growth

In the December policy review, the CPI inflation for 2018-19 was projected to be 2.7-3.2 percent in H2:2018-19 and 3.8-4.2 percent in H1:2019-20 with the potential for upside risks. However, the actual inflation for Q3:2018-19 at 2.6 percent is lower than the projection.

The Central Bank has put forth the following factors that will guide inflation in the coming months:

• Food Inflation has been on the downside and deflation has been observed across several items. Several food groups are experiencing excess supply conditions domestically and internationally and hence the short term outlook remains benign.


• The moderation in fuel group inflation was higher than expected and hence the outlook points towards a softer trend.


• Inflation excluding food and fuel remains high and the recent pick up in the prices of health and education is a one-off phenomenon.


• The crude price outlook remains broadly the same as in the December policy.


• The inflation expectations of households and input and output price expectations of producers have moderated as indicated by Reserve Bank’s surveys.


• The effect of the HRA increase for central government employees has dissipated completely.

Taking into account all these factors and the expectation of a normal monsoon in 2019, the CPI inflation has been revised downwards to 2.8 percent in Q4:2018-19, 3.2 - 3.4 percent in H1:2019-20 and 3.9 percent in Q3:2019-20.

In the December policy review, the GDP growth for 2018-19 was projected at 7.4 percent and at 7.5 percent for H1:2019-20. However, the RBI has pegged the GDP growth for 2019-20 at 7.4 percent that is 7.2 - 7.4 percent in H1 and 7.5 percent in Q3 on account of two major factors which are as follows:

• The bank credit and financial flowing to the commercial sector though strong are not broad-based.


• Global demand is slowing in spite of the softened crude prices and the lagged impact of the recent depreciation of the Indian rupee on net exports.

The Central Bank clarified that in the near term inflation is expected to remain moderate with some uncertainties that have to be monitored on a regular basis. These are as follows:

• Vegetable prices have been volatile and any increase in the same will have an impact on inflation.


• The outlook on oil prices continues to be hazy.


• Increase in trade tensions and geo-political uncertainties could adversely impact global growth.


• The unusual rise in the prices of health and education can be stressful.


• Volatility in Financial Markets.


• Although there is an expectation of normal monsoon, any variation from this could impact food inflation.


• Several measures in the Union Budget of 2019-20 could lead to a rise in the disposable income which over a period could impact inflation.

The MPC also called for more private investment activity as the current investment is supported by the public spending on infrastructure.

Our Take

We expect the change in the policy stance and cut in the repo rate to add to the growth momentum of the economy. Inputs from the Budget and RBI’s policy document indicate that GOI and RBI are on the same path with both placing more surplus into the hands of the people. This is going to drive consumption in the coming months.

The policy meeting has cleared the air about the direction of the monetary policy for the future. In this scenario, we continue to suggest an exposure into ultra short term and short term funds with our moderately aggressive and aggressive investors continuing to take exposure into dynamic bond funds.

We understand that the investor community is perturbed by the recent events that have happened at the corporate side resulting in panic among our investors about fixed income investments. We believe that this is a systemic risk and has impacted the industry as a whole. We advise our investors to stay invested, while the fund management teams go about their work of re-defining portfolios in the coming months.

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