Reserve Bank may not budge on rates

NONE OF THE 10 RESPONDENTS EXPECT THE CENTRAL BANK’S MONETARY POLICY COMMITTEE TO CUT RATES BEFORE JUNE

MUMBAI: After the Union budget dashed hopes of a fiscal stimulus, it may be the central bank’s turn to disappoint on monetary stimulus.

The Reserve Bank of India’s Monetary Policy Committee (MPC) may keep the repo rate unchanged at 5.15% at its meeting on Thursday as inflation remains high, a Mint survey found. Repo rate is the rate at which banks borrow from RBI.

None of the 10 respondents— bankers and economists—expect MPC to cut rates before June. All 10 were unanimous that the MPC will maintain an accommodative monetary policy stance as long as necessary.

“The budget proposals are unlikely to result in a quick upturn in GDP growth. Nevertheless, the likelihood of inflation printing above 6% for the second month in a row in January 2020, and declining gradually to 4% over the subsequent three quarters, suggest an extended pause from the MPC,” said Aditi Nayar, principal economist at ratings company ICRA Ltd.

In the December policy, the MPC surprised the market by keeping rates unchanged, awaiting the full transmission of previous rate cuts. Despite policy rate cuts totalling 135 basis points so far this fiscal year, new loans have become cheaper by only 44 basis points so far.

The MPC also raised its retail inflation forecast to 5.1-4.7% for the second half of this fiscal year, and 4.0-3.8% for first half of the next fiscal year, with risks broadly balanced. With inflation numbers expected to stay above 7% in January and above 6% till June, bankers and economists expect an extended pause and a continuance of the accommodative stance.

Minutes of the last MPC meeting, however, showed that all members expect inflationary pressures caused by costlier vegetables to reverse by the fourth quarter of this fiscal year.

“I see no rate change in February and April. June policy would be data-dependent. People are projecting higher inflation to continue for three more months. While core inflation will continue to be about 4%, headline inflation including food and fuel could be at an elevated level, not leaving enough room for rate cuts,” said Ashutosh Khajuria, executive director, Federal Bank.

The MPC lowered GDP growth forecast for FY20 from 6.1% in the October policy to 5.0% in the December policy and pegged growth for the first half of FY21 at 5.9-6.3%. The Economic Survey projects the economy to grow at 6-6.5% in FY21.

While expectations were high that the budget will boost spending to pump-prime the economy hit by sluggish private investment and consumption demand, the budget’s impact on growth may be minimal.