New RBI Governor, new Interest rate stance

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The Sixth Bi-Monthly Monetary Policy meeting saw a rate cut of 25 basis points resulting in the Repo rate falling from 6.5% to 6.25%.

The Monetary Policy Committee (MPC) also decided to change their stance from the “Calibrated Tightening” position to a “Neutral” stance.

Whilst the shift to neutral was largely expected, the 0.25% decrease in Repo rates was rather unexpected.

Since the last MPC meeting in December 2018, there has been a slowdown in global economic activity. Major emerging market economies too saw a slowdown in economic activity.

Crude oil prices bounced back from their December lows on production cuts but continue to remain below their peak levels in October.

Inflation edged lower in major Advanced Economies and many key Emerging Market Economies (EMEs).

The Central Statistics Office (CSO) released the first estimated for 2018-19 around the growth of the domestic economy placing the GDP at 7.2% which is the same level in 2017-18.

The Growth outlook is likely to be influenced by the following factors. First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based. Secondly, in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds. In particular, trade tensions and associated uncertainties appear to be moderating global growth. Taking into consideration the above factors, GDP growth for 2019-20 is projected at 7.4 per cent – in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3 – with risks evenly balanced.

CPI declined from 3.4% in October to 2.2% in December. Core inflation decelerated to 5.6% in December from 6.2% in October.

On the basis of the above the MPC decided to cut rates by 25 basis points also indicating that this is not a one time event. 4 out of 6 members voted for a rate cut while 2 members voted for rates to remain unchanged.

Your investments

The MPC noted its benign food inflation outlook, softer prices of items in the fuel-group, complete dissipation of the recent HRA hike and its current judgment of the recent jump in health and education CPI components to be a one-off phenomenon. However, it highlighted the reversal in vegetable prices, unclear oil price outlook, rising trade tensions, volatility in financial markets and the impact of various budget announcements on increasing disposable incomes as upside risks.

Considering the low likelihood of interest rates moving down significantly going forward due to the inherent risks indicated by the MPC, investors may continue to be better off holding shorter term fixed income assets including short term debt funds of high credit quality. The change in exposure norms to a single corporate of 20% for FPIs will be withdrawn which should help flows into debt markets from overseas investors.

Your Loans

Since credit growth has been rather strong in the recent past and deposit growth has not kept pace, you should expect that your loan EMIs may not immediately benefit as loan rates may continue to be held at current levels.

In the last policy meeting, 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. This could impact loan rates going forward.

The next policy meeting is scheduled from April 2 to 4, 2019.