Stance may turn ‘neu­tral’ in next MPC meet

Financial Chronicle - - MONEY GAME - PARNALI KSHIR­SAGAR

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.

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