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The central bank might signal the beginning of a benign interest rate cycle by changing its policy stance to ‘neutral’ at this week’s meeting, although budget incentives seeking to boost consumption may prompt the panel members setting the cost of funds to delay the cuts until the next review.
About a third of the 25 participants in the exclusive ET survey on interest rates believe the Monetary Policy Committee (MPC) of the Reserve Bank of India could slash rates by 25 basis points on February 7 itself, but the rest of the participants are betting that Mint Road experts would hit the ‘pause’ button this time.
“By the second quarter, the MPC will have greater clarity on food inflation, crude oil prices and the state of the global economy to better assess the quantum of rate cuts,” said Anubhuti Sahay, head, South Asia, Economics Research, Standard Chartered Bank.
An ‘accommodative’ stance points at rate cuts while ‘neutral’ entails possibilities of both increases and decreases.
In its December policy, the RBI hinted at a change in its stance to ‘neutral’ from ‘calibrated tightening’.
Doing so would give the RBI the flexibility to act on incoming data, according to Axis Bank chief economist Saugata Bhattacharya, who believes Mint Road would defer an action on rates until the next conclave.
“A rate cut in next week’s monetary policy review might be premature.
Risks, both global and domestic, are evenly balanced,” Bhattacharya said.
In the interim budget, the government sought to boost rural spending and offered tax rebates.
In FY19, the government would end with a fiscal deficit of 3.4 per cent instead of 3.3 per cent estimated earlier.
“The RBI is likely to factor in the modest fiscal slippage,” said Radhika Rao, economist with DBS Bank.
“We await the central bank’s commentary to gauge its assessment of domestic and external risks… The pro-consumption bias in the FY20 budget might be seen as a lagged risk to the core inflation outlook.”
However, the proponents of immediate rate cuts cite sustained lower oil prices and excess food output, factors that have caused headline inflation to undershoot expectations.
BofA-ML (trader’s call) and HDFC Bank are among the eight survey participants that expect the RBI to decrease the repo, or the rate at which banks borrow from the central bank, by at least 25 basis points.
The repo is now at 6.50 per cent.
“All three parameters, including inflation, global crude oil prices and GDP growth, are benign, which makes a case for a quarter percentage point rate cut at least,” said Jayesh Mehta, MD and country treasurer of Bank of America ML.
“Food inflation is expected to remain low due to excess production.
This could be a prudent approach to cut the rate, pushing up growth at this juncture,” said Jayesh Mehta of Bank of America ML.
Since October last year, global crude oil prices have fallen 28 per cent, slashing New Delhi’s import bills.
Total foodgrain output in the country was at 275.68 million tonnes in 2017-18, about 10.64 million tonnes (or 4 per cent) more than what was produced in 2013-14, showed data from the ministry of agriculture.
“It will send confusing signals if an inflation-targeting central bank remains active only at the upper end of inflation, not the lower end,” said Abheek Barua, chief economist, HDFC Bank.
“You have to be nimble-footed in monetary policy.”
The Consumer Price Index, a retail inflation gauge, dropped to 2.2 per cent in December while the RBI’s nearterm inflation target is 4 per cent.
“The proposed tax rebate and higher allocation for farm/rural sectors will increase disposable incomes,” said Rahul Johri, chairman and founder of Vector Finance, an MFI.
A World Bank report slashed the growth forecast for the advanced economies to 1.6 per cent in 2020, down from 2.2 per cent in 2018.
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Market sees RBI setting course towards rate cut
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