India Insight:MPC keeps rates on hold,limited scope of further monetary easing

Repo rate unchanged vs our expectation of a 25bp cut: All six members ofthe MPC (Monetary Policy Committee) voted to maintain the repo rate (therate at which the RBI injects liquidity) at 6.25% in the policy review today.

Accordingly, the reverse repo and marginal standing facility (MSF) rate standadjusted at 5.75% and 6.75%, respectively. The minutes of the MPC’smeeting will be published on Feb 22 and will record the views of eachmember.

MPC shifts monetary stance from accommodative to neutral: In the pressrelease, the MPC mentioned that it would like to see how the impact of thetransitory effects of demonetisation on inflation and output gap play out. Wenote that the banks have already cut lending rates by ~200bp on MCLRs(marginal cost based lending rates) and by ~80–85bp on base rate vs a175bp cut in the repo rate by the RBI. Going forward, we believe the scope forfurther monetary easing is rather limited as upside risks to inflation continue tobe led by (a) pent-up consumption demand on remonetisation, (b) rising ruralwages (up 8.2% YoY as of Dec-16), (c) higher minimum support prices foragricultural produce and (d) global factors, including movement in globalcommodity prices (especially oil) and uncertainties regarding the direction ofUS macroeconomic policies. We believe India’s rate-cut cycle is mostlyover as of now, and any scope for further monetary easing will belargely data-dependent.