The policy rate decision comes after a two-day deliberation on June 6 and 7 by the Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel announced in the second bi-monthly monetary policy for 2017-18. The projection of real GVA (gross value added) growth for 2017-18 has accordingly been revised 10 bps downwards from the April 2017 projection to 7.3%, with risks evenly balanced.
MPC noted that incoming data suggest that the transitory effects of demonetisation have lingered on in price formations relating to salient food items, entangled with excess supply conditions with respect to fruits and vegetables, pulses and cereals.
“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” RBI said in the policy statement.
On liquidity front, the RBI also reduced the Statutory Liquidity Ratio (SLR) of all banks to 20% from 20.50% of their net deposits from the fortnight starting June 24. This is done in order to give greater flexibility to banks to comply with the LCR (liquidity coverage ratio) at 100% on January 1, 2019, in an efficient manner. The SLR cut is by itself positive as it signals that the RBI is confident of the government’s commitment to fiscal consolidation.
RBI also maintained a neutral stance on monetary policy and highlighted the inflation levels falling down below 4% on a durable basis. It sees inflation in 2-3.5% range in the first half of the ongoing financial year and 3.5-4.5% in the second half.
Market participants perceived the policy to be more dovish than the previous one, thereby increasing the probability of a rate cut in the August policy review. Both bonds and the rupee appreciated after the announcement, with the 10-year benchmark bond yield trading down at 6.57 percent and the rupee appreciating 9 paise to 64.34 to the dollar.
BANK NIFTY continued to trade in tight range throughout the day after making highs in early trades. Traders continued to be on cautious note. Volatility took over just at the time of policy announcement where Bank Nifty was seen breaking down the range to lower levels. Repo rate left unchanged as expected but surprisingly SLR cut boosted Bank Nifty to recover back to all time highs levels on closing basis. (Banking stocks will remain in focus.)