India Macro Weekly: Liquidity drives RBI's monetary policy

For the week ending April 8, 2017:

  • RBI’s first monetary policy for 2017-2018 was the highlight event. While the central bank kept the policy repo rate unchanged at 6.25%, signaling no change to systemic lending rates; it did increase the reverse repo rate to 6%. In line with the liquidity overhang in the system, the increase in reverse repo rate will further assist in sucking out excess liquidity from the system, at least partly brought on by the demonetisation drive.
  • The central bank also released a slew of survey results, which gave more bad news than good. Capacity utilisation declined in Q3, FY17 from the previous quarter, indicating a continuing slackness in demand, which does not bode well for India’s investment cycle. Even though this was partly explained by a drawing down in inventories, the increase in raw material to sales ratio does not indicate a robust demand future either.
  • Consumer confidence delivered a shocker, with the current situation index actually falling into pessimistic territory and future expectations also declining quite a bit. Consumers expect both overall economic conditions and price levels to be unfavourable to them in the future.
  • However, businesses are feeling somewhat more positive, with an improvement in business expectations on account of overall conditions.
  • The Macro Meter rating remained unchanged as consumer and business confidence switched ratings. 


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