In line with consensus expectations RBI left all rates unchanged in the credit policy review today. The repo rate remains at 6.75% while the reverse repo rate is 5.75%.

The RBI expects it January 2016 consumer price Index (CPI) inflation target of 6% to be met while it projects inflation to be around 5% by the end of fiscal 2016-17 assuming normal monsoon but without factoring in the impact of seventh pay commission. RBI has left its Gross Value Added (GVA) growth number for current fiscal 2015-16 unchanged at 7.4%. For fiscal 2016-17, the RBI expects growth to strengthen gradually to 7.6%.

In its forward guidance RBI stated that it "continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on the development of inflation. Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5% by the end of 2016-17" – Sixth RBI Bi-monthly Monetary Policy 2015-16, February 2, 2016

Conclusion and Outlook

While keeping rates unchanged in its credit policy review today, RBI has maintained the accommodative stance of monetary policy. The gradual pace of economic recovery, low global crude and commodity prices, and a relatively stable exchange rate vs other emerging market currencies should help in containing inflation over the medium term.

The focus now shifts to the upcoming Union Budget wherein fiscal deficit target for fiscal 2016-17 will be keenly watched. The recent hikes in excise duty on petrol and diesel will provide significant cushion to government to manage fiscal deficit against the additional burden of seventh pay commission and One Rank One Pension (OROP) in our opinion. Low inflation and benign inflation outlook, falling fiscal deficit and low Current Account Deficit (CAD) are all supportive of lower yields^.

As highlighted repeatedly over the past several months or so, we continue to recommend adding duration to fixed income portfolios.

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