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No Hike but change in stance to ‘Calibrated Tightening’ | BNP Paribas Mutual Fund

No Hike but change in stance to ‘Calibrated Tightening’


  • The RBI maintained a status quo on the key policy rates as the monetary policy committee (MPC) voted in favor of no hike. They kept the key lending rate unchanged at 6.5%.
  • The MPC changed its stance from neutral to “calibrated tightening” in agreement 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 change in its stance indicates that the MPC remains ready to hike, if inflation pressures become more adverse.
  • The RBI maintained its forecast for GDP growth to strengthen to 7.4% yoy in FY2019 (year-ending March 2019) from 6.6% in FY2018, as it sees the risks evenly balanced. Also, the RBI significantly revised its consumer price inflation forecasts downwards to 4% in Q2 FY19 (from 4.6% earlier), to 3.9-4.5% in H2 (from 4.8%), and to 4.8% in Q1FY20 (from 5%), with risks “somewhat to the upside”.
  • In the post policy conference the RBI governor made it clear that inflation targeting remains the anchor of monetary policy. He also mentioned the interest rates will not be used to manage the currency, but the MPC will respond to the inflationary consequences of depreciation.
  • Although higher oil prices and a weaker currency could add to near-term cost pressures, the RBI acknowledged the expected inflation undershoots on lower food inflation and tighter financial conditions. The pause also gives it a chance to wait and observe the impact of the hikes already delivered.
  • The MPC notes that global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals.
  • RBI also acknowledged the government efforts to maintain fiscal deficit targets and timely intervention to resolve IL&FS issue.


Equity, fixed income and forex markets were expecting support from the central bank in order to limit the currency depreciation. But the RBI made it clear it will leave the market forces to decide the exchange price while they will aim to provide adequate liquidity and keep macro variables in check.


  • By keeping the rates unchanged, the RBI feels that the earlier two hikes of 25 bps each in a matter of two months were adequate or have been acting as insurance towards the currency depreciation.
  • More importantly, they have walked the talk since the August policy by keeping the handle on liquidity tight which is reflected in the credit deposit ratio of 76% and whatever liquidity is available should move towards meeting credit demand.
  • Further, they have re-iterated their stance to monitor inflation and would be nimble going forward in case inflation moves higher. Our in-house assessment towards consumer price inflation for Jan – March 2019 is in the range of 5.10-5.25% and core inflation more than 6.00% which could be a cause of concern.
  • By changing the stance, they have suggested the next possible move would be data dependent on growth front, be it domestic or global and oil prices,
  • The Deputy Governor has re-iterated their stance on monitoring liquidity and will provide durable liquidity as and when required.
  • We expect the risk reward to favour the shorter end of the curve (i.e. up to two years) since the curve is already at elevated levels pricing in three hikes.
  • On the duration part, we feel the global headwinds are far too many and add to it the domestic concerns over fiscal front like GST revenues /disinvestments and an outside chance of populist political decisions. Though, with reduced borrowing program and close to INR 1.25 - 1.50 Lakh crore (USD 18 -21 billion) open market operation (OMOs) have been keeping the demand supply in check.
  • Going forward we expect two more hikes of 25bp each in the FY 2019. We expect the 10 year G-Sec yield to trade between 8.00 - 8.15% for most part of the quarter.
  • We continue to remain invested in the shorter end of the curve (upto 3 years) however we are open to tactical duration calls.

Source: RBI, Bloomberg


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 Trustee, Asset Management Company, 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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