RBI likely to keep policy rates unchanged for the rest of FY19: Anand Rathi

December 06
14:56 2018

Sujan Hajra

Anand Rathi Securities

As expected, the RBI maintained status quo on key policy rates at its December 2018 monetary policy meet. It also announced a calibrated 150bp cut in the SLR. The tone of the policy was largely dovish.

While the “calibrated tightening” stance of the interest rate policy continues, the RBI remains accommodative regarding liquidity. We expect it to keep rates unchanged in FY19.

The backdrop

The overwhelming weight of events since the last monetary policy meeting seems to have prompted RBI to maintain status quo on rates for the second successive time. Retail inflation is well below its projected target.

The sharp slump in global crude oil prices also minimises the risk of a fuel-price-led spike in inflation. The strengthening of the rupee eases the risk of imported inflation as well.

While there are doubts about whether the US Federal Reserve Chairman has actually communicated a dovish stance, the consensus is that tightening in the US will be far more contained than what was expected a few months ago.

On the top of this, the real growth rate in the quarter ending September 2018 has been more than a percentage point lower than that in the quarter before. Therefore, it was not a surprise that the RBI held the policy rates at its December monetary policy meeting.

RBI forecloses the option of a rate cut

As an explicitly inflation-targeting central bank, the clear mandate of the monetary policy is to take necessary measures to keep inflation around 4 percent. Moreover, the RBI is obliged to target retail and not any other form or component of inflation.

With the current retail inflation is substantially lower than this target and the RBI’s own projection of a further fall in the inflation during the rest of FY19, it is pertinent to question whether the central bank could explore a rate cut in a period when the real interest rate is at a historic high.

Unfortunately the RBI has foreclosed this option. While moving from a ‘neutral’ to a ‘calibrated tightening’ stance at the last policy meet, the bank explained that the transition means that the ‘rate cut’ option is off the table.

Interestingly, the ‘calibrated tightening’ phrase, on to its own admission, pertains only to the policy rate and not the liquidity. The latter turned accommodative post-August 2018 on the backdrop of upheavals in the corporate debt market and among the NBFCs.

NBFCs may continue to need support; SLR cut negative for bonds

The RBI has taken numerous general and NBFC-specific measures to ease the liquidity situation for NBFCs. The outcome has so far been on desired lines. Yet, problems faced by NBFCs would require considerable recasting of balance sheets and would be a long-drawn process. It is to be seen the extent to which the RBI aids this process.

The phased statutory liquidity ratio (SLR) cut announced on December 5 would help the banking system with a seriously stretched credit-deposit ratio. This is also in line with the RBI’s long-term objective to reduce pre-emption of banks’ resources by the government without undermining the quality of banks’ balance sheets.

Yet, the process would potentially reduce bank holdings of the government by Rs 2 trillion by mid-2020 and may therefore be negative for the bond market.


The RBI is likely to keep the policy interest rate unchanged for the current financial year. We feel that its change in policy stance from accommodative to neutral was ahead of the curve as also the move from neutral to calibrated tightening.

As a data-dependent explicitly inflation-targeting central bank, the RBI should not procrastinate on reverting to the easing stance if inflation continues to hold below the target.

The author is Chief Economist at Anand Rathi Securities.

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