RBI policy review is positive, but time for caution

The RBI Monetary Policy Committee’s first bimonthly monetary policy review for FY2018‐19 in April 2018 came up with no surprises as there were no changes in policy rates. However, RBI’s projection on inflation for FY2018-19 was toned down from the February 2018 policy review estimate of 5.1%-5.6% to 4.7%-5.1% for the first half of FY2018-19 (April-Sept. 2018). Also, for the second half of FY2018-19 (Oct. 2018-March 2019), the inflation estimate was also reduced from the February 2018 review estimate of 4.5%-4.6% to 4.4% in the April 2018 policy review.

The downward revision in inflation estimates is a welcome trigger that has perked up market sentiments. Lower inflation means that the RBI has no reason to hike interest rates, and a lower interest rate regime is conducive to industrial investments.

While the RBI’s dovish stance on policy rates and projected outlook on inflation are positives for the markets, investors need to be watchful on the crude oil price front. Any sharp upturn in the international crude oil prices can trigger inflationary spiral and upset India’s economic cart. Moreover, the implementation of government’s plan to provide higher minimum support prices (MSPs) for agricultural produce can trigger food inflation, which can then force RBI’s hand to increase interest rates to contain inflation. The ever-present geopolitical risks are always a threat to the markets. Hence, investors need to be cautious and take these factors into consideration before taking any call on the markets.