While there were expectations of announcements with regard to a potential uncollateralised Standing Deposit Facility (SDF) to absorb excess liquidity, the central bank refrained from that. It seems that introduction of an SDF remains a work in progress. No further details or specific target date were indicated.
We feel that there might be a need for an amendment in the RBI Act, which currently prevents it from borrowing without extending collateral, before the central bank can roll out uncollateralised SDF facility.
The RBI’s commentary maintained a cautious tone, more cautious than what we had expected in this round, given only a gradual rise in domestic inflation indicators of late, the recent rupee appreciation, stability in commodity prices, and a relatively dovish commentary from the US Federal Reserve, despite hiking rates as expected.
The RBI forecasts inflation at 4.5 per cent for the first half of 2017-18 and five per cent for the second half, while flagging upside risks to its baseline projections. We expect Consumer Price Index-based inflation to average 5.3 per cent during 2017-18.
The RBI expects economic activity to strengthen during 2017-18, a view we share. However, growth will likely be more back-loaded during the year, in our view.
On balance, while the neutral policy stance does not exclude the RBI’s change in the repo rate in either direction, it seems the bias of the Monetary Policy Committee is to keep the repo rate on hold in the coming months, potentially through 2017.