Emergence of conflicts in growth-inflation dynamics is worry!

RBI in mark-time mode looking for clarity on the if's and but's in play

It is not a major surprise to see this go as non-event. What is worrisome is the emerging conflicts between growth-inflation dynamics, thus shifting RBI from accommodative stance to balanced approach in the short term. RBI's FY16 growth outlook at 7.8% (against Budget estimate of 8.0-8.5%) and CPI expectation at higher end of 4-6% tolerance zone is not comfort to the stakeholders or to financial markets. While an accommodative monetary policy will build risk of CPI inflation overshoot beyond 6% (against monsoon and supply side worries), status-quo stance may push GDP growth momentum into 7.5%. In this scenario, it is safe to assume that next rate cut or CRR cut is not round the corner, and is distant away! It would need miracles to expect rate (and/or CRR) cut on or before June policy review.

Next rate cut subject to policy transmission is non-starter!

None realise that till end of 2014 (when Repo rate was 8%), Bank's Base Rate was heavily subsidised against 3-12 month deposit rates at 8.5-9.5%. Now that the marginal cost is down at 8.0-8.75% (on outgoing deposits), it has only resulted in relief (on the pain) but not yet into comfort zone to cut Base Rate. It is also obvious that elevated short term money market rates with steep inversion in the rate curve is not an accommodative stance when Banks ALM profile is skewed at lending long and funding short, thus squeezing the margin. It is essential that the rate curve has to turn flat, if not steep upward sloping for effective (and efficient) transmission.

No major take-away from the policy

Given the policy status-quo with build up of conflicts in growth-inflation dynamics with risk of extended pause mode, rest of policy guidance (and measures) have no great relevance.

Financial markets in bearish consolidation mode

There may not be great optimism till June-September; positive US economic data is major risk on India for extended pause in policy stance. 10Y Gilt is the worst hit for extended stay at 7.70-7.80%. NIFTY focus now is into lower end of 8270/8470-8700/8785 and Bank NIFTY under pressure at 17700-18700, while USD/INR in administered mode at 62-63/64.

It is not a great start into FY16!

Moses Harding