What does this mean for the markets? The GSec yields will continue to be elevated in the region of 7-7.10 per cent unless inflation moves in a contrary direction, which seems unlikely. The rates had firmed up after the earlier policy when a similar hawkish tone was assumed in the communication.
Second, maintenance of interest rates at the current level is also good for FPI inflows which is useful from the point of view of forex reserves and will help to keep the rupee strong. With US rates likely to be increased, there was the fear of FPI flows slowing down to EMEs including India. In fact, with the current account likely to widen such flows will help to firm up the rupee. This may not be a good sign for exports as a stronger rupee could come in the way of a significant improvement.
Third, the investment cycle will still continue to be contingent on the demand conditions which have shown some signs of recovery in the last two months. However, unless the capacity utilization rates improve and the NPA issue of banks gets in the mood of resolution, the demand and supply for credit would still be moderate.
The policy hence clearly takes a stance on both inflation and growth and believes that the right way to go is for a neutral stance. Unless inflation falls very sharply or growth slumps, will there be a reversal till March 2018. This can be the main takeaway.
Madan Sabnavis is a Chief Economist, CARE Ratings. Views expressed are personal.
Chief Economist, CARE Ratings
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.