RBI s Fourth Bi-Monthly Monetary Policy Review ( ) Maintains status quo...neutral Stance. Repo Rate unchanged at 6.00%

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1 RBI s Fourth Bi-Monthly Monetary Policy Review ( ) Maintains status quo...neutral Stance Repo Rate unchanged at Reverse Repo Rate stands at 5.75% Marginal Standing Facility and Bank rate at 6.25%. SLR cut by 50 bps to 19.50% GVA growth projection for FY18 has been reduced from 7.30 per cent to 6.70 percent. MPC warns about the fiscal actions and expressed concerns about the loss of momentum in economy RBI expects inflation trajectory to rise from current levels and has revised the inflation forecast for second half from 3.50%- 4.50% previously to 4.20%- The next meeting of the MPC is scheduled on 5th & 6th December, The Reserve Bank of India (RBI), in its fourth Bi-Monthly Monetary Policy Review ( ), kept the policy repo rate unchanged at 6.00 per cent. Five of the six members of the MPC voted in favor of the rate decision, whereas one voted for a 25 bps cut. Consequently, the reverse repo rate under the LAF remains at 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.25 per cent. The RBI left the Cash Reserve Ratio (CRR) of scheduled Banks unchanged at 4 per cent of their net demand and time liability (NDTL). However, they reduced the Statutory Liquidity Ratio by 50 bps to 19.50%. The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. The move to keep the policy rates unchanged was much anticipated. According to a Bloomberg survey, 31 of the 32 economists expected RBI to leave the repurchase rate unchanged at 6%. The inflation had picked up towards the RBI s medium term target of 4 percent to 3.36% as per the latest reading and rupee had been under pressure since past few days as the global investors withdrew funds from domestic market. The oil prices and commodity prices have also been strong which signaled a status quo stance by RBI. IIP Update India s factory output expanded by a modest 1.2% YoY in July, 2017, after contracting by 0.17% YoY in June, on account of continued slow down manufacturing sector especially that of capital goods. Growth of the manufacturing sector, which makes up 77.6% of the index, decelerated sharply to 0.1% YoY in July compared to 5.3% YoY in the same period of In terms of industries, only eight out of the twenty three industry groups in the manufacturing sector have shown positive growth during the month of July Mining and electricity sectors however grew at robust 4.8% YoY and 6.5% YoY, respectively in July. Output of capital goods a proxy for infrastructure investments contracted 1% YoY in July as against a growth of 8.8% YoY in the year-ago period. Consumer Durable goods met with similar fate, with production declining 1.3% YoY as against a nominal growth of 0.2% YoY a year earlier. During April-July, FY , IIP grew by 1.7% YoY, down from 6.5% YoY in the same period last year. CA Harshit Mantri harshit.mantri@smifs.com

2 Inflation update India s Consumer Price Index (CPI) based inflation rose to a five month high of 3.36% YoY in August 2017 against 2.36% YoY in July 2017, on soaring food and petrol prices, higher housing expenses and a transient impact of the recently-introduced indirect levy goods and services tax (GST). The rate however is still below the Reserve Bank of India's (RBI) medium-term target of 4%. The CPI had risen by 5.05% YoY for the month of August, a year ago. India s Wholesale Price Index (WPI) based inflation rose to a four-month high of 3.24% YoY in August as prices of food articles, led by onions and vegetables, soared. WPI Inflation was 1.88% YoY in July 2017 and 1.09% YoY in August The last such high level of inflation was witnessed in April when the rate of price rise was 3.85% YoY. During the month, prices of food articles went up by 5.75% YoY in August against 2.15% YoY in July. Vegetable prices shot up by 44.91% YoY in August against 21.95% YoY in July. Onion prices witnessed a sharp surge of 88.46% YoY in August against a contraction of 9.50% YoY in the previous month. Inflation in manufactured products witnessed a slight increase at 2.45% YoY in August against 2.18% YoY in July. In fuel and power segment, inflation saw a sharp surge to a near double digit at 9.99% YoY against 4.37% YoY in July. Fuel inflation shot up as petrol and diesel prices continued to remain high relentlessly on global crude oil rates, while power tariffs shot through the roof on lower domestic production. Trade Balance India's exports grew by 10.29% YoY to USD23.81 billion in August 2017 on account of rise in shipments of engineering, petroleum, chemicals and pharmaceuticals products. Imports too rose by 21.02% YoY to USD35.46 billion in August due to rise in inward shipments of crude oil and gold. Gold Imports increased to USD1.88 billion in August against USD1.11 billion in the same month last year. Oil imports were valued at USD7.75 billion in August, an increase of 14.22% over the same month in As a result, trade deficit in the month widened to USD11.64 billion from USD7.7 billion during the same month a year ago. Cumulative exports during April-August of FY rose by 8.57% YoY to USD billion while imports increased by 26.63% YoY to USD billion, leaving a trade deficit of USD63.14 billion. Key Notes from Monetary Policy RBI cut the FY18 GVA growth forecast to 6.70 percent from 7.30 percent Inflation during October-March forecast 4.2 percent to 4.6 percent, faster than previous 3.5 percent to 4.5 percent projection. RBI lowered the proportion of deposits which banks need to invest in specified securities, such as government bonds, to 19.5 percent from 20 percent effective Oct. 14 and the ceiling on SLR under HTM will be cut in phased manner. Consolidation of state government debt will be undertaken and will will review short selling rules in government bonds. MPC observed CPI inflation had risen since last meeting and expects inflation to rise from current level on the backdrop of momentum building in prices of items excluding food, especially emanating from crude oil. However, yesterday the government cut a domestic levy on gasoline and diesel which will directly lower the CPI inflation ahead but will also hit the government finances at a time of slowing growth. The panel reiterated that it is imperative to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities get utilised and the requirements of new capacity open up to be financed. RBI continues to work towards the resolution of stressed corporate exposures in bank balance sheets The next meeting is scheduled on 5th and 6th December 2017.

3 01-Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug-17 Indian Government 10 Year Bond Yield India s CPI and WPI Trend 9.50% 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 5.50% 4.00% 3.00% 2.00% 1.00% 0.00% CPI WPI Key Quotes by MPC The governor warned about the fiscal actions like farm loan waivers and said fiscal deficit can undercut macro economic stability. A 50 bps expansion in fiscal deficit in FY18 could push up inflation by 25 bps above baseline scenario. Recent high frequency data suggested that growth is on uptick and there is a possibility that cyclical upturn can happen. The RBI is open to consider all instruments for bank recapitalization. Governor Patel said implementation of GST has stalled revival of growth in some ways but expects issues on GST may get resolved in second half of fiscal. The outlook for Agricultural sector is positive whereas some weakness persist in manufacturing sector. RBI s Monetary Policy Stance 9% CRR Repo Rate Reverse Repo 8% 7% 6% 5% 4% 3% 2%

1-Dec-14 1-Feb-15 1-Apr-15 1-Jun-15 1-Aug-15 1-Oct-15 1-Dec-15 1-Feb-16 1-Apr-16 1-Jun-16 1-Aug-16 1-Oct-16 1-Dec-16 1-Feb-17 1-Apr-17 1-Jun-17 India s GDP Growth Trend INR Vs US Dollar 9.00% 8.00% 7.

4 1-Dec-14 1-Feb-15 1-Apr-15 1-Jun-15 1-Aug-15 1-Oct-15 1-Dec-15 1-Feb-16 1-Apr-16 1-Jun-16 1-Aug-16 1-Oct-16 1-Dec-16 1-Feb-17 1-Apr-17 1-Jun-17 India s GDP Growth Trend INR Vs US Dollar 9.00% 8.00% 7.00% 4.00% 3.00% 2.00% 1.00% 0.00% India s Fiscal Deficit Trend India s Trade Deficit Trend 7.00% 4.00% 3.00% 2.00% 1.00% 2.50% 6.40% 4.90% 5.70% 4.90% 4.60% 4.10% 3.90% 3.51% In $ Billion % FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Brent Crude Price Trend (In $/bbl) India s Industrial Production Trend $55.77/bbl 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% 1.20% 0 4-Oct-12 4-Oct-13 4-Oct-14 4-Oct-15 4-Oct-16 4-Oct-17 Source: RBI, Bloomberg, SMIFS Research

Market Impact The RBI s decision to keep the policy repo rate unchanged was on expected lines. However, they reduced the Statutory Liquidity ratio by 50 bps to 19.

5 Market Impact The RBI s decision to keep the policy repo rate unchanged was on expected lines. However, they reduced the Statutory Liquidity ratio by 50 bps to per cent effective 14th October This means that the statutory requirement for banks to hold bonds has come down and hence demand for bonds may come down. In anticipation of this there was a sell of in bonds which lead to spike in bond yields. The bond yields inched up 8 bps from 6.62 percent to 6.70 percent. Simultaneously, the rupee strengthened by 0.60 per cent to against the dollar. The RBI decision had no impact on the equity market as the benchmark Nifty 50 and Bank Nifty traded flat after the announcement. Nifty ended points higher at and Bank Nifty ended 9.90 points up at Intraday Indian Government 10Y Bond Yield Chart

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Status Quo..Neutral Stance

RBI s Sixth Bi-Monthly Monetary Policy Review (2016-17) Status Quo..Neutral Stance Repo Rate unchanged at 6.25 per cent Reverse Repo Rate at 5.75% Marginal Standing Facility and Bank rate at 6.75%. GVA