RBI’s Monetary Policy and what it means for the retail investor

RBI’s Monetary Policy and what it means for the retail investor

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The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) declared on Thursday raised the reverse repo rate (RBI’s borrowing rate), by 25 basis points. This was done by unanimous decision in the six-member committee – the rate raised to 6% .

What does this mean?

– Clearly, to ask for any more interest reductions from the RBI may be wishful thinking ( they indicated Neutral but I would add “with an upward bias”, at least in the shorter to medium term).

– the RBI continues to remain “inflation focused” ( it has projected inflation at about 4.5% and 5% in 2017 and 2018. With the wholesale inflation at 6% and retail at 3.5% – one can expect the same to trickle down). In the words of the RBI committee, the risks to inflation are “evenly balanced” even when it reduced its inflation target.

Amongst the threats it listed:

The main was uncertainty surrounding the monsoon due to the revival of the El Niño effect July-August; the implementation of the house rent allowance component of the 7th Pay Commission and the possible one-off effects from the goods and services tax during the execution stage.

” The general fiscal deficit, which is high by international comparison, poses yet another risk for the path of inflation, which is likely to be exacerbated by farm loan waivers,” clearly worried (and most rightly so) about a new trend set off following the UP elections.

Obviously the RBI does not indulge in double speak like our Babus & Netas and for them ” neutral means neutral and does not mean decrease in repo rates”. I would expect that, there would be upward pressure on money market rates.

The RBI is positive about GDP growth and has projected gross value added growth of 7.4% for the current financial year and 8.1% for fiscal 2018-19.

This is because the RBI believes that; “The output gap (the gap between potential output and what the economy is actually producing) is gradually closing. Consequently, aggregate demand pressures could build up, with implications for the inflation trajectory”.

I would not depend on banks to cut lending rates because they will try to recoup their losses on NPAs. Commercial banks will continue to pay lip service to RBI Gov by reducing a couple of basis points here and there for the photo opportunities it gets their CMDs.

The RBI’s neutral stance should encourage all retail investors to also adopt a neutral stance – when it comes to taking duration risks.

Retail investors should therefore, not make / renew their bank fixed deposits beyond 6 months – 1 year.

Retail mutual fund investors should stick to Liquid Funds and at the most to Ultra Short Funds.

Retail investors should be wary of those mutual fund managers, who keep giving a positive spin, by indicating interest rate reductions in the hope to attract higher inflows into their funds especially debt funds. Worse are those who also end up believing in their own sales stories; giving “negative returns”.

(Watch these funds carefully – do they recover and change their professed view on interest rates? After all it’s either their integrity or their ability which get in doubt – it may be time for the retail investor to find more competent fund managers)

Retail investors should remain on guard against RMs, bankers and mutual fund sales staff presenting themselves as your friends and benefactors – advising them to take on short / long term maturity debt funds.

If you do wish to take duration exposure make sure you understand the downside risks involved. Don’t get pushed into it by some one who is driven by fees, commissions and bonuses.

Only you can take care of your own interests – Happy investing!


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One Reply to “RBI’s Monetary Policy and what it means for the retail investor”

  1. Banking Operations require to be re jigged and re calibered no doubt. However despite Globally Central Banks increase / keep up lending rates in a poor attempt to rein in inflation which has yet to register success. In India this policy has only led to higher rates for SMEs as only the Big Boy Corporates have enjoyed the concessions given.
    Certain Industries delay payments much beyond stipulated limits and starve the SME Vendors who get little or no support from Their Bankers and soon appear on The Banks NPA Radar from which stage it is a steep one way descent unfortunately.
    India requires India Specific Interest Rate Specific credit rate policy in my opinion.

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