Monetary policy lives up to consensus (Guest Column)

By cutting its key lending rate by 25 basis points and keeping its policy stance unchanged at "neutral", on Thursday the Reserve Bank of India (RBI) has gone along with the widespread expectations.

The MPC (Monetary Policy Committee) has lived up to the consensus by cutting rates by 25 bps while continuing with the neutral policy stance.

A key takeaway from the policy is the projection of benign inflation for FY 2020, which has come lower than expectations between 2.9 to 3 per cent for H1 (first half) and between 3.5 to 3.8 per cent for H2. This means that the headline inflation for FY 2020 is unlikely to go beyond 3.8 per cent anytime in FY2020.

Since the Gross Domestic Product (GDP) growth rate for FY 2020 has been lowered to 7.2 per cent in this benign inflation scenario, one can expect more rate hikes probably two more this calender year (CY).

The stance has been maintained at neutral perhaps in the context of the rising crude price and concerns regarding a below normal monsoon.

Since this important event is behind us, the market trend, going forward, will be influenced by the capital flows into the market. So long as the US Fed and European Central Bank remain dovish, more flows can be expected into the market, which can impart resilience to the market. However, high valuation of markets remain an area of concern.

(Dr. V.K. Vijayakumar is the Chief Investment Strategist at Geojit Financial Services.)

--IANS

vijaykumar/in/bc