But what about future monetary policy action?
To be sure, even though the government has decided to breach the fiscal deficit target, it is not too growth supportive (please refer to our budget analysis for more on this). At 6% GDP growth, the economy is expected to remain below potential in the coming fiscal. This implies that once the inflationary pressures show clear signs of easing1, the MPC will resume the rate cutting cycle, especially as it continued to retain its accommodative monetary policy stance in today’s meeting. In fact, the MPC statement categorically mentioned “there is policy space available for future action”. This, along with regulatory changes announced today with respect to providing adequate durable liquidity, will also help assuage bond yields.
1 It is important to note that household inflation expectations which had shown a sharp pick up in the previous round have once again eased as per the latest January 2020 round: three month and one year ahead household inflation have fallen by 60 and 70 bps respectively.