Stance may turn ‘neutral’ in next MPC meet
THE monetary policy committee members may vote to shift RBI’s policy stance to ‘neutral’ from ‘calibrated tightening’ in February, opening space for a possible rate cut in FY20 if upward risk to inflation does not materialise in the coming months, economists said.
Inflation may remain benign if the lagged impact of minimum support price (MSP) hikes, volatility in oil, rupee and global markets, household inflation expectations, fiscal slippage, and second round impact of state HRAs does not materialises, economists added.
“With MPC’s focus on headline CPI inflation, we see limited scope for rate moves in the foreseeable future. If low food inflation sustains and pans out to be a more structural phenomenon (we believe it is a mix of structural and cyclical) and crude prices continue to hover around the current levels, we do not rule out a shift in the policy stance to ‘neutral’ in the next meeting, which could be followed up with rate cut if inflation data is supportive,” said Suvodeep Rakshit, economist at Kotak Mahindra Bank.
Further, economists also believe RBI may downwardly revise GDP growth forecast to 6.9-7 per cent for second half of FY19 in the next policy meeting from the current 7.2-7.3 per cent level, as the impact of fall in crude oil prices (on corporate margins) may likely be seen during the last quarter instead of Q3FY19.
According to Karthik Srinivasan, group head-financial sector ratings ICRA, “Overall, there appears to be a substantial likelihood of a change in the monetary policy stance to neutral from calibrated tightening. This may well be followed by a repo rate cut in Q1 FY2020, if the feared inflationary pressures do not materialise.”
Thus until the next MPC meeting between February 5-7 next year, investors focus would be on sustenance of oil prices around the current level of $60 a barrel, Federal Reserve’s rate path in CY2019 along with developed market central banks’ policies, volatility due to events such as Brexit, trade wars amid weak rabi crop production, and lagged impact of MSP.
On Wednesday, the monetary policy committee voted to keep repo rate unchanged and at the same time lowered their inflation projection for the second half of FY19, given the sharp fall in oil prices coupled with stabilising rupee.
“In our view, the RBI will continue to maintain the ‘calibrated tightening’ stance unless there are clear signs of an easing in core inflation. Given the scalingdown of near-term inflation projection, it is highly likely that the RBI will keep the policy rate unchanged in the next 3-4 months,” said Dhananjay Sinha, head, institutional research, economist and strategist at Emkay Global Financial Services.