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RBI’s Repo rate cut was on expected lines

“The RBI has gone ahead and cut REPO rate by 25 bps, which was in line with market expectations, accordingly the REPCO rate stands at 6%. With the CPI inflation for June coming down sharply to 1.54%, the market had high expectations that RBI will take steps towards easing rates in the systems. Further the weakening IIP numbers added more to the expectations and accordingly it seems the RBI has acted. With oil prices likely to remain benign aided by a stronger Rupee, should reduce the volatility associated with imported inflation.
The outlook for economic activities in terms of core developed markets like US viz; improved labour conditions and increased consumer spending remains strong. Euro Zone is showing signs of pick up along with some green shoots from Russian, Chinese and Japanese economy. Liquidity remains strong in the system, as the Govt is front loading its budgetary spending. Headline inflation is still expected to be 2-3.5% in 1HFY18 and 3.5-4.5% in 2HFY18 and there are several factors which are contributing to the base line inflation trajectory. Implementation of farm loan waiver by states may result in fiscal slippages as well as the timing of the state implementation of the 7th CPC. The momentary policy committee noted that the head line inflation excluding HRA impact is around the 4% mark. The GVA forecast for FY17-18 has been kept at 7.3%. Rollout of GST has been smooth, monsoon has been normal and inflation excluding food & fuel has fallen significantly and is expected to remain soft. The MPC is committed to keep headline inflation close to 4%, on a durable basis and has decided to keep the policy stand neutral by watching incoming data.”

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