Credit Policy Review - June 2017

Credit Policy Review - June 2017   The Monetary Policy Committee (MPC) voted 5-1 in favor of leaving the policy repo rate unchanged at 6.25% in line with consensus expectations. The reverse repo rate has also been kept on hold at, 6.0%, while the cash reserve ratio (CRR) remains at 4.0%. However, the RBI has reduced the statutory liquidity ratio (SLR) to 20% from 20.5% from June 2017 in order to provide banks with greater flexibility in their lending operations. The RBI sharply lowered its inflation projections for first half of FY18 to 2.0%-3.5% (from 4- 4.5% earlier) and for second half of FY18 to 3.5%-4.5% (from 4.5-5% earlier), with risks evenly balanced, rather than being on the upside as suggested earlier. It also lowered its FY18 GVA growth projection marginally to 7.3% from its 7.4% projection made during the April policy meeting. Despite CPI inflation moderating sharply in April, the MPC decided to leave policy rate unchanged because as per RBI - “premature action at this stage risks disruptive policy reversals later and the loss of credibility”. In the press conference, the RBI stated that the current moderation of inflation was due to several factors - demonetization, supply glut etc. - that are very difficult to disentangle at this stage; thus, the MPC needs to ‘unravel’ these factors before taking any action. The RBI maintained its neutral policy stance, stating that it would “remain watchful of incoming data” as it needs to assess “whether or not the unusually low momentum in the reading for April will endure”.

Conclusion-and-Outlook With rising yields and encouraging developments in inflation, INR, US interest rates and improved clarity on GST, monsoons etc., we had recently highlighted (read our note: Risk Reward Reasonable, Once again dated June 1, 2017) that the risk reward in fixed income markets was reasonable. The MPC in its credit policy review today kept policy repo rate unchanged with a less hawkish tone and sharply lowered inflation projections for this fiscal year. In case the incoming data reaffirms the moderating path of inflation, it may create some space for easing in our opinion. HDFC MF Reveiws-