RBI Monetary Policy, June 2018

Monetary Policy:

As the macroeconomic outlook becomes less transparent the monetary policy committee has only become more steadfast in its neutral stance. This leaves room for all possible outcomes and actions. The neutral stance has often been equated to a status quo for policy rates. So, the rate hike of 0.25% may come as a surprise to some.

Inflation has always remained at the core of policy decisions. Oil prices have already increased by 12% since April. More clarity on global oil prices may emerge after OPEC’s meeting later this month. Till date, price hikes have been passed on to the end consumer. Raw material costs have also spiked as a result of this. The RBI anticipates an upward inflationary trend and is working to manage this.

On the other hand, India’s growth story continues to remain positive. A normal well-spread out monsoon bodes well for the agriculture sector. Urban and rural consumption look healthy. Capacity utilization in the manufacturing space has improved. The resolution of stressed assets is ongoing and better provisioning norms are ultimately working in favour of banks.

Investment Strategy:

Rising bond yields should be viewed as investment opportunities rather than pain points. The RBI’s neutral stance does not provide a clear view of where interest rates are heading. Risks are elevated when there is less clarity. Asset allocation will play an important role in mitigating risks.

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