The Monetary Policy Committee (MPC) review meeting concluded today, announcing no policy rate change (repo rate stays at 6.25%, the reverse repo rate at 6%, and marginal standing facility rate at 6.5%). It maintained its neutral monetary policy stance but significantly softened its tone on inflation. Five out of six members were in favour of the monetary policy decision.
The MPC’s fiscal 2018 forecasts on gross value added (GVA) growth and consumer price inflation (CPI) were both lower. GVA growth was mildly reduced to 7.3% (down 10 basis points) but the inflation forecast was brought sharply down to ~ 3.5% (from 4.8% average). The MPC reiterated its medium-term inflation target of 4%.
Despite a sharp reduction in its inflation forecast, the MPC’s policy stance has been kept neutral citing inflation risks on which they seek more clarity. Yet, we believe, given the likely undershooting of inflation, the ‘neutral’ stance has a de facto softening bias. Our inflation forecast is lowered to 4% (down from 5% earlier) for fiscal 2018, given the downside from food inflation. We now assume increased chances of 25 basis points (bps) repo rate cut, most likely in the August MPC review meeting.