The monetary policy committee of the Reserve Bank of India (RBI) kept the repo rate unchanged today at six percent. The reverse repo rate also remains unchanged at 5.75 per cent. The announcement has come amid falling inflation rate and decreasing bond yield. The six-member committee headed by Urjit Patel made the announcment today setting course for the new financial year 2018-19.

The RBI has also revised CPI inflation projection to 4.7-5.1 per cent in the first half of the financial year and 4.4 per cent in the second half 2018-19. Gross Domestic Product or GDP growth is estimated to grow at 7.4 percent in 2018-19 against 6.6 per cent in 2017-18.

Abheek Barua, Chief Economist & Executive Vice President, said, “This was an unexpectedly dovish policy with the RBI highlighting inflation risks (oil, procurement prices, HRA for government employees) but at the same time revising their forecasts downward. If this is a permanent shift in the paradigm of inflation management from a singular focus on bringing long-term inflation down to 4% to an approach that is more supportive of growth, then the RBI might go for a long pause.”

Inflation

The announcement has come following a dip in Consumer Price Index (CPI) to four-month low of 4.44 percent  in February 2018 compared with 5.07 per cent in January 2018, after touching the high of 5.2 percent in December last year. The move was expected as inflation is likely to stay below RBI’s estimates of 5.1 per cent  for the fourth quarter of 2017-18.

However, rising crude oil and commodity prices along with  increased minumum support price for farmers could increase the inflation rate in future.

Garima Kapoor Economist, Elara Capital, said, “The recent softening in retail inflation that had firmed up during early months of winter, supported RBI’s decision to maintain status-quo. The recent moderation also supported a downward revision to RBI’s forecasts for FY19 CPI inflation. However, we expect headline CPI inflation to overshoot RBI’s forecast. We expect retail inflation to remain in the range of 4.7%-5.6% in H1 FY19 (vs. RBI’s forecast of 4.7%-5.1%) and 3.7%-5.0% in H2 FY19 (vs. RBI’s forecast of 4.4%).”

Bond Market

Bond yields have declined to 7.13 per cent following the monetary policy announcement with the RBI keeping a dovish stance interest. Barua added, “Bond yields that have rallied are likely to move down a little more. However, whether this is a transient bout of ‘dovishness’ or whether it will endure (especially if one of risks were to surface) remains the key question.”

In a surprise move last month, the government announced to borrow 48 per cent of the total borrowings in the first half of financial year 2018-19. Considering most of the borrowings are made in the first half of the financial year, bond yield declined by 29 basis points on the single day to 7.33 per cent, the biggest fall since November 25, 2013.  For 2018-19 the government has planned to raise Rs 6.05 lakh crore , compared with Rs 5.99 lakh crore  in the previous year. The announcement came as a breather for the bond market, where yields on the government bonds started rising towards the end of 2017.

Base Rate and MCLR

Recently several banks have increased their lending rates. For example, State Bank of India, India’s largest bank by assets, increased its base rate by 5 bps at 8.70% per annum, with effect from April 1, 2018. HDFC Bank increased its marginal cost of lending rate (MCLR) for one year by 10 basis points to 8.3 per cent. ICICI Bank also raised its one-year MCLR to 8.30% from 8.20% earlier.