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Repo rate unchanged at 6.25%, RBI Policy Remains Neutral

Jun 7, 2017

The Reserve Bank of India today decided to keep the policy repo rate unchanged at 6.25% in a 5-to-1 vote. Dr. Ravindra H. Dholakia was not in favour, marking the first policy meet under the Monetary Policy Committee (MPC) regime initiated in Oct-16 where the policy vote was not unanimous.

The MPC maintained its neutral stance on monetary policy and achieving a medium-term target for CPI of 4% ± 2%, while supporting growth.

While the repo was unchanged, the Statutory Liquidity Ratio (SLR) was cut by 50bps to 20% of the Net Demand and Time Liabilities (NDTL). The move to cut SLR could be interpreted as a measured tool for minor monetary easing.

Given the political regime’s focus on Housing and allied initiatives in the sector, the RBI:

  • Reduced the risk weight on certain categories of housing loans sanctioned on and after today. The risk weights have been reduced in certain Loan to Value (LTV)/Outstanding Loan baskets from 50bps to 35bps and 75bps to 50bps.
  • The RBI also reduced the standard asset provisioning rate on these loans from 0.4% to 0.25%. As an aside, the RBI had in Apr-17 recommended stricter standard asset provisioning rates for Telecom sector loans which were earlier provisioned at 0.4%.

The next meeting of the MPC is scheduled on 1-Aug-17.

Key highlights

Rising Global Trade, Rising Imports

The MPC highlighted stronger global economic growth and a pickup in global merchandise trade volume, as well as strong imports.

Positive Change in Tone Relative to Prior MPCs on Rising Inflation Risks

The RBI’s concern over rising inflation risks was markedly toned down relative to previous committee minutes. The committee highlighted record foodgrains production, record advance estimates on fruits and vegetables, significantly higher rabi procurement, a benign monsoon forecast, crude oil prices remaining soft globally and non-fuel commodity prices rolling over due to weak demand in China as key reasons.

Further, expectations for three months ahead and a year ahead surveyed in the RBI’s inflation expectations survey of households ticked down marginally. The Apr-17 CPI reading came in well below 4%; in fact, CPI has fallen below 4% since Nov-16, brought about by deflation in the prices of pulses and vegetables. Excluding food and fuel, inflation dipped 60 basis points from a month ago to 4.4%

Mixed data on the Domestic Front but Some Leading Indicators Are Positive

The RBI highlighted mixed data on the domestic economic front. The second estimate of FY17 GVA at 6.6% was ~0.1% pt. lower than the Feb-17 estimate. Freight carriage gathered momentum, signaling economic activity acceleration, and passenger car sales accelerated on the strength of urban demand. Activity in tourism and hospitality was strong, but offset by weakness in steel consumption and cement production.

While the manufacturing and services purchasing managers index remain in growth territory, new orders for both domestic and exports slowed down.

Muted Reaction on the 10 Year

Ten-year yields tanked to 6.57% by the close of the day which we believe reflects the RBI’s acknowledgement of lower inflation expectations and the softening of its prior hawkish tone on inflation.


  • CPI revised downwards: The RBI expects CPI in the range of 2.0-3.5% in H1FY18 (vs. 4.5% in prior meet) and 3.5-4.5% in H2FY18 (vs. 5% ion prior meet).
  • GVA growth is projected to strengthen to 7.3% in FY18 (earlier estimated at 7.4% in Apr-17) from 6.7% in 2016-17 with upside risks from Government spending and continued re-monetisation balanced by rising input costs, wage pressures and an expected delay on private investment demand revival (on the back of over-leveraged corporate sector and stressed banking sector).

Net-net, a policy hike looks to be off the table, inflation is likely to remain muted and rural demand is expected to strengthen. Given the RBI stated concerns on easing prematurely and having to reverse later, with the attendant loss of credibility, the likely path for forward policy remains neutral.