RBI seen keeping rates unchanged but softening its hawkish stance
MUMBAI: The Reserve Bank of India (RBI) is expected to keep rates unchanged in this week’s monetary policy review, but soften its hawkish stance amid slower economic growth and record-low inflation, according to a Mint poll of 12 economists.
While the current growth-inflation dynamics may warrant an easing of monetary policy to stimulate the economy, RBI’s monetary policy committee (MPC) will likely wait longer for proof that the trend is sustainable before changing its neutral stance, the economists said. The MPC will unveil the policy on Wednesday.
Economic growth slowed for the fourth consecutive quarter in the three months ended March, mirroring the impact of the November demonetisation of high-value banknotes on key sectors such as construction and financial services. Gross domestic product growth slowed to 6.1% in the fiscal fourth quarter from 7% in the third.
According to DK Joshi, chief economist at rating agency Crisil Ltd, the chances of a rate hike this year have faded substantially. In its February meeting, RBI’s rate-setting panel shifted its monetary policy stance to neutral from accommodative.
In the subsequent meeting in April, one member of the MPC, RBI executive director Michael Patra, had suggested a pre-emptive 25 basis point hike in the repurchase or repo rate, minutes of the meeting showed. A basis point is one-hundredth of a percentage point.
Patra, along with five other members of MPC, eventually decided to vote in favour of holding the repo rate—at which RBI infuses liquidity into the banking system—unchanged at 6.25% and wait for more data.
Since then, retail inflation dropped to a new record low of 2.99% in April from a nearly fivemonth high of 3.89% in March on a lower base effect and lower food prices.
Economists said consumer price index (CPI)-based inflation is expected to have remained below 3% in May, much below the medium-term target of 4% that the MPC is committed to.
Risks to inflation have eased because of the earlier-than-expected onset of the south-west monsoon. The India Meteorological Department has predicted normal rainfall in the June-September monsoon.
Additionally, the implementation of the goods and services tax (GST) will ease CPI inflation by 25 to 50 basis points because some items in the CPI basket fall in the exempt category; a reduction in the tax rate is proposed for several others.
“We expect the RBI to maintain the neutral stance but possibly change its perception on inflation to balance or even the downside,” Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, wrote in a June 1 report.