Xmas cheer or greed and fear…What RBI’s policy means for your finances.

RBI

The Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 6.5 per cent, along expected lines.

The decision of the MPC was linked to inflation staying well within the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, whilst also supporting growth.

Since the last MPC meeting in October 2018, global economic activity has shown increasing signs of weakness on rising trade tensions across developed markets. Economic activity also decelerated in major emerging market economies in Q3.

Crude oil prices have declined sharply, reflecting higher supplies and easing of geo-political tensions. Gold price has risen due to safe haven demand triggered by political uncertainty in some geographies.

GDP growth in India slowed down to 7.1 per cent year-on-year (y-o-y) in Q2:2018-19, after four consecutive quarters of acceleration. The GDP growth for 2018-19 has been projected at 7.4 per cent (7.2-7.3 per cent in H2) as in the October policy, and for H1:2019-20 at 7.5 per cent, with risks somewhat to the downside.

October inflation at 3.3 per cent turned out to be unexpectedly low. In the last policy in October 2018, CPI inflation was projected at 4.0 per cent in Q2, 3.9-4.5 per cent in H2 and 4.8 per cent in Q1:2019-20, with risks somewhat to the upside.Inflation expectations have come down since then and thus the MPC decided to keep the policy repo rate on hold and maintain the stance of calibrated tightening with one member voting to change the stance to neutral.

Your investments

The lower than expected inflation print in October, fall in oil prices and slowdown in global growth saw the RBI hint slightly towards a possible rate cut moving forward as the declining trend in inflation continues but stated that they will have a close eye on data over the next 3 months.This move is coming after a continuous stretch of an increasing interest rate cycle.

However, although the inflation is projected at 2.7-3.2 per cent in H2:2018-19 and 3.8-4.2 per cent in H1:2019-20 risks to the upside pertain to the turn around in food prices of certain items that have been unusually low, effect of MSP still not being realized and being unsure of its effects, and volatility in oil prices continue.

Moreover, any fiscal slippage at this point, state/central level, will directly affect inflation, increase market volatility and crowd out private investment. Liquidity deficits are likely to be controlled through continued Open Market Operations ( OMOs) to deal with liquidity.

Whilst it is very tempting to try to take substantial exposure to long term bonds, due to a possible interest rate cut in the future, we would recommend to continue exposure to debt through exposure to ultra short, short term and medium term debt with high credit quality.  The fear of interest rate hikes could give way to the greed of interest rate cuts. Staying away from the greed and fear cycle works best in our experience.

Your Loans

The MPC has recommended the use of external benchmarks by banks for their floating rate loans instead of the present system of internal benchmarks applicable April 1st 2019.

The spread over the benchmark rate will be decided at the banks’ discretion at the inception of the loan and should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change  This will help bring transparency, standardisation, and ease of understanding of loan products by borrowers, as a bank must adopt a uniform external benchmark within a loan category.

The next policy is expected on Feb 7, 2018.