Reaction by Saravana Kumar, Chief Investment Officer, LIC Nomura Mutual Fund on RBI monetary policy

• At the monetary policy review today (April 5, 2016), RBI cut the repo rate by 25bps. This was in line with our and market expectation. The RBI has tightened the reverse repo and MSF (Marginal Standing Facility) band by 50bps. This will reduce the volatility in money market rates and is a consequence of RBI's actions to improve liquidity.
• The effort towards moving liquidity closer to neutral is a good measure. This should help in reducing the cost of funding specifically in tight liquidity conditions.
• From a policy rate perspective, RBI will likely wait out and watch for (1) monsoon progress, effect on food prices, retail inflation and (2) transmission of rate cut in the system.
• While the stance of monetary policy remains accommodative, the tone of the RBI’s policy was not dovish. It is possible that CPI inflation will undershoot RBI trajectory, and is expected further repo rate cut of 25bps in June ’16. The room for any aggressive rate cut is significantly lower now as effects of 7CPC (estimated 100-150 bps higher inflation) and slower disinflationary impulses from the global economy amongst others will keep the inflation trajectory on a steady but slower downtrend.
• CPI inflation trajectory broadly tracks the RBI’s trajectory and will likely reach ~5.6% by March 2016 and sub-5% by March 2017.