RBI unlikely to change its stance on interest rates this fiscal

The RBI stuck to its guns on monetary policy and did not budge on interest rates. However they reduced the SLR by 50 basis points (bps). While five members of the Monetary Policy Committee (MPC) were in favour of the decision, one member - Ravindra Dholakia - voted for a 25 bps cut in policy rate. The RBI said inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year. At the same time, MPC remains committed to keep headline inflation close to 4% on a durable basis. The RBI categorically said that with the evolving outlook over inflation there is no room for further accommodation, which means, barring a major disinflationary shock from commodities market, we may see RBI stay put till the remainder of FY18. On fiscal policy, RBI cautioned government from expanding fiscal deficit from current levels as it deems the consolidated fiscal deficit of 6 per cent as high.

We were not surprised by the neutral stance from the RBI as we have maintained that Indian economy needs macro-economic stability, at a time when it is enacting structural reforms, which extract a near term cost from the economy. For instance, demonetisation, GST and various other measures to cleanse Indian economy. Macro-economic stability comes from conservative fiscal policy and prudent monetary policies. Effect is strong and stable currency and low bond yields. Indian economic slowdown is a side-effect from reformist measures. Be it GST hurting business sector, formal economy and informal economy or be it investment slowdown due to twin balance sheet issues and efforts to formalise the economy. There is little impact the RBI can have on growth by reducing repo rates further or by government to engage in bigger fiscal spend. These decisions to lower cost of capital and to spend more is always a trade-off between macro-economic stability and growth and with adverse cost benefit ratio, it is understandable that the RBI has stuck a neutral tone.

The Indian rupee gained from a neutral RBI monetary policy as the threat around "real rate story" has minimised. The rupee is a play on real rates and global dollar trend. The US dollar dropped from 65.50 levels to 64.93 levels on spot, as exporters and speculators stepped in to sell the currency. We turned bullish on rupee against dollar, around February of this year, after the RBI changed its stance from dovish to neutral. High real rates made us become a bull on Rupee, when it used to trade well above 67 levels on spot. We continue to expect rupee to remain strong against the dollar and trade at 64.50/30 levels over the near term.

Anindya Banerjee is Associate Vice President -  Currency Derivatives, Kotak Securities