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Our view on the RBI policy - 6th June 2019
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Our view on the RBI policy - 6th June 2019

KEY HIGHLIGHTS OF THE MONETARY POLICY

  • In line with our expectations, the RBI cut repo rate by 25 bps to 5.75%
  • Monetary Policy Committee (MPC) changed its stance from "neutral" to "accommodative"
  • MPC voted unanimously in favour of rate cut and change of stance
  • RBI intends to continue injecting durable liquidity in to the banking system


OUTLOOK

The policy was very positive and was reinforced by the unanimous voting and the change in stance to "accommodative". The statement’s focus on supporting growth and bolstering private investment as long as inflation remains within the mandate is also encouraging and leads us to believe that more accommodation is on the cards.


Our own expectations for growth and inflation for FY2020 also underscore this view as we expect headline inflation to average under 4% and have revised our growth forecasts lower. Key risks to inflation trajectory could arise from monsoon turn out, unseasonal spikes in vegetable prices, crude oil prices, geo-political tensions, financial market volatility and the fiscal scenario.


The setting up of an internal committee for liquidity framework review by RBI is a welcome step. We believe it will help to reduce the information asymmetry regarding systemic liquidity and will benefit not only markets but also banking decisions as regards, deposit-taking, lending, and transmission. Also the constitution of this committee suggests that the focus is likely to make the transmission process more efficient. Further, in light of the recent upheavals in the NBFC (non-banking financial company) space, the governor's statement that "all necessary steps would be taken to maintain financial stability" is reassuring.


Given the downside risks to growth, we expect one more rate cut (25 bps) in August ‘19. Contingent on inflation risks remaining contained, there could be a 25 bps rate cut in the October ’19 meeting as well. In our view it primarily means that the RBI’s main focus now is transmission given growth and financial stability concerns. While this could come from more easing as there is scope for further growth disappointment relative to the RBI’s forecasts, it will mostly come via better liquidity management, for which the RBI has set up a committee to review its liquidity framework.


Data Source: RBI



DISCLAIMERS

The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but BNP Paribas Asset Management India Private Limited (BNPPAMIPL) makes no representation that it is accurate or complete. BNPPAMIPL has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. These forward looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. BNPPAMIPL undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof. The words like believe/belief are independent perception of the Fund Manager and do not construe as opinion or advise. This information is not intended to be an offer to sell or a solicitation for the purchase or sale of any financial product or instrument. The information should not be construed as an investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The sector(s) mentioned in this document do not constitute any recommendation of the same and BNP Paribas Mutual Fund may or may not have any future position in these sector(s). The Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.


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