The RBI has retained its GVA (Gross Value Added) growth projection for FY17 at 7.6%. The inflation projections given in the April ’16 policy statement have also been retained but with an upside bias. Retail inflation in April ’16 rose more than expected largely due to food prices and as per RBI, makes the future trajectory of inflation somewhat more uncertain. However, the expectations of normal monsoon and various supply management measures of the government should moderate unanticipated firming up of food prices.
In its forward guidance RBI has stated that “given the uncertainties, the Reserve Bank will stay on hold, but the stance of monetary policy remains accommodative. The Reserve Bank will monitor macro-economic and financial developments for any further scope for policy action.”
The credit policy review today was along expected lines with RBI staying on hold until further clarity emerges on monsoon and its impact on food prices. RBI has reaffirmed that the stance of monetary policy will remain accommodative. Additionally, RBI will continue to provide liquidity as per the changes in its liquidity management framework wherein progressively the deficit in the system is being brought to a position closer to neutral.
The expectations of strong monsoon, low MSP hikes for kharif crops of 2016-17, continued reforms by the government and higher public capital expenditure to augment supply side capacity forms the basis for our positive view on inflation going forward. Additionally, continuing fiscal consolidation, and low current account deficit are also supportive of lower yields.
While we are cautiously positive on equity market, we advise you to increase exposure to good quality bonds (tax free and regular) and duration based debt mutual fund schemes into your portfolio. We encourage increased exposure to equities through SIPs for long term wealth creation.