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Fixed Income Markets - October 2016

The RBI’s newly formed Monetary Policy Committee (MPC) under the Chairmanship of its new governor Dr Urjit Patel released its first monetary policy statement.

 

Interest Rates: The RBI reduced the Repo rate by 25 bps from 6.50% to 6.25%. This was broadly consistent with the direction of policy that many participants in the market were anticipating, although timing of this rate cut was being debated about. All six members of the Monetary Policy Committee (MPC) voted unanimously in favour of the decision.

 

Inflation: The MPC acknowledged the recent improvement in CPI inflation. Further, supply side measures and strong improvement in sowing is likely to bode well for food inflation outlook. However, the MPC retained earlier stance of 5% March’17 CPI target and 4.5% by end FY 2018. It continued to flag possible upside risks (albeit lower than the previous months) on account of 7CPC and possible spill overs from MSP hikes.

 

Global Growth: A departure from earlier positioning, RBI seemed quite worried about global growth. This was the most prominent reason attributed to the rate action in press conference and later in a conference call with research analysts. For India, growth target was retained at 7.6% YoY for FY2017 and forecast at 7.9% for FY 2018.

 

Real Rates: RBI has also indicated that they would look at lowering the real interest rate band from ~150-200 bps to ~125bps which could open up room for further rate cuts if inflation moderates. RBI also notes that this neutral rate is dynamic and trending downwards global