Sixth Bi-monthly Monetary Policy Statement: MPC does the right thing by holding the repo rate steady

Monetary conditions have already tightened

Looking at FY 18-19, RBI expects inflation to end the year at about 4.5%.  This year, FY 17-18, RBI expects inflation to be 5%, about 0.5% higher than its original estimate.

Growth is expected to pick up in 2018-19 to 7.2% from 6.6% this year.

Capacity utilisation continues to be low – in the low 70’s.

Credit growth is still running low – just 6.5% during FY 17-18 up to March 2, the last data point available. Now deposit growth has also slowed - just 4% for the same period.

In fact, monetary conditions have tightened – one year treasury bills yield about 6.7%, 0.4% more than when the RBI last reduced the repo rate in early August 2017. The same has been the case with the 10 year treasury bond – yields are up by more than 1%. In recent days some banks have raised both deposit rates and lending rates. SBI, India’s largest bank, is in this list. The rupee on real effective rate basis has continued to get overvalued over the last year.

RBI perversely has had a significant role to play in the response by the bond market: in February last year the RBI inexplicably shifted its stance from accommodative to neutral, and to make matters worse followed this up in August with a reduction the repo rate! The worsening fiscal situation of the government has also played a role.

With the one year rate at 6.7%, and the one year inflation forecast at about 4.5%, real rates are solidly high about 2%.

Please read my earlier blogs on this topic, inluding my  last July's blog.