RBI s Sixth Bi-Monthly Monetary Policy Review ( ) Maintains status quo...neutral Stance

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1 7h February 2018 RBI s Sixth 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%. GVA growth projection for FY18 has been reduced from 7.10per cent to 6.10 percent. Relief for MSME Borrowers who have registered under Goods and Services Tax & Removal of Credit Caps on MSME (Services) under Priority Sector RBI expects CPI inflation to come down to 4.5%-4.6% in the second half of the next fiscal. The next meeting of the MPC is scheduled on 4h & 5th April, The Reserve Bank of India (RBI), in its sixth 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 change. 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 decision of the MPC is consistent with the 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 main considerations underlying the decision are set out in the statement below. The move to keep the policy rates unchanged was much anticipated. According to a Bloomberg survey, All but one of the 33 Economists expected RBI to leave the repurchase rate unchanged at 6%. Headline inflation averaged 4.6 per cent in Q3, driven primarily by an unusual pick-up in food prices in November. Domestic pump prices of petrol and diesel rose sharply in January, reflecting lagged pass-through of the past increases in international crude oil prices. Considering these factors, inflation is now estimated at 5.1 per cent in Q4, including the HRA impact. IIP Update Index of Industrial Production (IIP) increased to a 19-month high of 8.4% YoY in November 2017 against a revised 2.0% YoY in the previous month, mainly on account of a higher Manufacturing growth. The Industrial output last rose faster than November 2017 was in March 2016 at 9.8% YoY, according to Bloomberg. The growth can also be attributed to a lower base in the year-ago period when demonetization hurting demand. However, growth number for October 2017 was revised downward from 2.2% YoY registered earlier to 2.0% YoY. During November 2017, Manufacturing sector grew by 10.2% YoY compared with 2.2% YoY growth registered in October Growth in Mining sector also accelerated to 1.1% YoY in November from 0.1% YoY in October. Among the use-based category, Consumer Nondurables production growth rose by 23.1% YoY in November 2017, which was on account of lower base and sharp growth in Pharmaceutical products. On the other hand, Capital goods output rose 9.4% YoY in November compared with 6.6% YoY in October. Rahul Agarwal rahul.agarwal@smifs.com

2 7h February 2018 Inflation update India s Consumer Price Index (CPI) based Inflation hit a 17-month high in December CPI Inflation came in at 5.2% YoY in December 2017 against 4.88% YoY in November, mainly due to increase in foods and oil prices. This increase was also attributable to the last year s base of demonetization. CPI Food Inflation continued to witness a jump, with prices of food rising 4.96% YoY in December from 4.42% YoY in November. Food inflation remained volatile with prices falling in September and firming up from October, as eggs, vegetables and fruits became relatively more expensive. Vegetables prices grew 29.13% YoY in December as compared with 22.48% YoY a month ago, while prices of pulses continued to fall % YoY as compared with % YoY in November. Core Inflation too remained high in December at 5.1% which can be attributed to partial pass-through of rise in input prices and HRA implementation. Fuel Inflation, which has seen an uptick in July, remained unchanged at 7.9% YoY in December. Housing Inflation grew 8.25% YoY in December from 7.36% YoY a month ago.at a time when India s CPI Inflation has been accelerating, Wholesale Price Index (WPI) based Inflation decelerated to 3.58% YoY in December from 3.93% YoY in the previous month. Among the major groups, Wholesale Food Inflation decelerated to 4.72% YoY in December from 6.06% YoY a month ago while Fuel Inflation accelerated to 9.16% YoY against 8.82% YoY during the same period. Inflation for Manufactured items remained the same at 2.61% YoY in both November and December.The rate of Inflation based on WPI Food Index consisting of 'Food Articles' from Primary Articles group and 'Food Product' from Manufactured Products group decreased from 4.1% YoY in November to 2.91%YoY in December Vegetables Inflation witnessed some softening at 56.46% YoY in December as against 59.8% YoY in the previous month. However, onions witnessed a whopping % YoY rise in Inflation. Inflation in protein rich eggs, meat and fish cooled to 1.67% YoY in December 2017, while that in fruits spiked to 11.99% YoY. Trade Balance India s Exports grew by 12.36% YoY in December 2017 to $27.03 billion on account of strong performance by sectors like engineering goods and petroleum products. Exports have been on a positive trajectory since August 2016 to December 2017 with a dip of 1.1% YoY in the month of October Exports of engineering goods as well as petroleum products showed an increase of over 25% YoY in December However, shipments of readymade garments declined by 8% YoY to USD1.33 billion in December Cumulative value of Exports for the period April-December, FY , was $ billion against $ billion in the year-ago period, registering a growth of 12.05%. On the other hand, India s Imports surged significantly to $41.91 billion, up 21.12% YoY, on increased inbound shipments of crude oil and gold. Gold imports surged by 71.5% to $3.39 billion in December against $1.97 billion in December Cumulative value of Imports for the period April-December, FY , was $ billion against $ billion in the year-ago period, registering a growth of 21.76%.

3 Key Notes from Monetary Policy RBI cut the FY18 GVA growth forecast to 6.60 percent from 6.70 percent. In terms of actual outcomes, headline inflation averaged 4.6 per cent in Q3, driven primarily by an unusual pick-up in food prices in November. Though prices eased in December, the winter seasonal food price moderation was less than usual. Domestic pump prices of petrol and diesel rose sharply in January, reflecting lagged pass-through of the past increases in international crude oil prices. Considering these factors, inflation is now estimated at 5.1 per cent in Q4, including the HRA impact. Financial markets have become volatile in recent days due to uncertainty over the pace of normalisation of the US Fed monetary policy in view of January payrolls data showing rapidly accelerating wage growth and better than expected employment. The volatility index (VIX) has climbed to its highest level since Brexit. CPI inflation for is estimated in the range of per cent in H1, including diminishing statistical HRA impact of central government employees, and per cent in H2, with risks tilted to the upside. Even though the current account deficit narrowed sharply in Q2 of on a sequential basis, it was higher than its level a year ago, mainly due to widening of the trade deficit. As per RBI Governor.Multiple taxes on capital are impacting the investment to GDP ratio in India. The next meeting of the MPC is scheduled on April 4th and 5th, 2018.

4 7h February 2018 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% 5.00% 5.00% 4.00% 3.00% 2.00% 1.00% CPI WPI 0.00% Key Quotes by MPC The Governor stated that the rise in crude prices and hardening of non-oil Industrial raw material prices has lead to a revision in inflation expectation from 5.1% TO 5.6% first half of the next fiscal,whereas in the next half it is expected to be it is expected to be in the range of 4.5% to 4.6%. The Governor stated growth in Export is expected to improve due to improvement in global demand. The MPC expects the Investment-GDP ratio to improve,by way of credit take-off. Governor Patel said shifting away from the stated fiscal path is not conducive to our objectives. As per the Deputy -Governor for GST-Registered MSME s banks have given a 180-day NPA Recognition Cycle. As per the RBI Governor the Capacity utilization remains subdued. RBI s Monetary Policy Stance 9% CRR Repo Rate Reverse Repo 8% 7% 6% 5% 4% 3% 2%

7h February 2018 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 India s GDP Growth Trend INR Vs US Dollar 9.00% 8.00% 7.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.

5 7h February 2018 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 India s GDP Growth Trend INR Vs US Dollar 9.00% 8.00% 7.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% India s Fiscal Deficit Trend India s Trade Deficit Trend 7.00% 5.00% 4.00% 6.40% 5.70% 4.90% 4.90% 4.60% 4.10% 3.90% 3.50% % 2.00% 1.00% 2.50% % FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Brent Crude Price Trend (In $/bbl) India s Industrial Production Trend % % % % 2.00% % % 0 01/30/13 01/30/14 01/30/15 01/30/16 01/30/17 01/30/1 Source: RBI, Bloomberg, SMIFS Research

6 Market Impact The RBI s decision to keep the policy repo rate unchanged was on expected lines. There has been a Relief for MSME Borrowers who have registered under Goods and Services Tax and the Removal of Credit Caps on MSME (Services) under Priority Sector is a positive sign amidst such hawkish stance taken by RBI in its announcements,thus reflecting a bit of optimism in the future. The RBI decision had no significant impact on the equity market as the benchmark Nifty 50 and Bank Nifty traded flat after the announcement. Nifty ended 20 points down at and Bank Nifty ended 80 points down at Intraday Indian Government 10Y Bond Yield Chart There has been a drop in yield post monetary policy results were out.

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