Just a few days after the shock review of the gross domestic product (GDP) data and weeks away from the roll-out of the goods and services tax (GST), the Monetary Policy Committee (MPC) is expected to keep the repo rate unchanged in the upcoming policy review on June 7 bankers and analysts said.
The tone of the policy statement is expected to be far less hawkish than the April statement as well as the minutes of the MPC’s April 2017 meeting, given the ebbing of some inflation risks in the intervening period, they said. Also, the latest decline in growth figures reveals that economic activity had begun slowing even before demonetisation of high denomination notes in November 2016.
Stating that the Reserve Bank of India (RBI) is likely to keep rates on hold, Naresh Takkar, managing director and group chief executive, ICRA, said: “The CPI (Consumer Price Index)-based inflation has remained below four per cent — the medium term target — for six consecutive months.
Moreover, several of the inflation risks highlighted by the MPC in April 2017 have subsequently abated, with the improved outlook for the monsoon, rate structure of the goods and services tax (GST) and easing of commodity prices.” In the April policy, the MPC had cited upside risks to inflation arising from price pressure excluding food and fuel as the main reason for keeping its repo rate unchanged at 6.25 per cent, according to the minutes of the meeting released last month.
However, Michael Patra, RBI executive director and an MPC member, favoured an increase in the repo rate by 25 basis points as a pre-emptive move to curb inflation pressures, but finally went along with others in the six-member committee in keeping it steady at 6.25 per cent. Tanvee Gupta Jain, economist, UBS Securities, said that consumer inflation has moderated from previous highs, although upside risks to inflation clearly persist. “We expect CPI inflation (excluding house rent allowance) in H2 FY18 (average 5-5.5 per cent) to be much higher than in H1 (average 3-3.5 per cent).
On the policy outlook, while we expect a prolonged pause, any uptick in underlying price pressure would push the MPC to hike rates,” Jain said. However, a section of economists says that a rate cut is likely in the August policy. “While many believe that the RBI’s change of stance from ‘accommodative’ to ‘neutral’ may have been hasty, we believe the central bank did have some ‘special reasons’.
However, we also believe that its time the RBI adjusts its inflation forecasts to strengthen its credibility. We expect it to lower its inflation forecast for FY18 at the June 7 meeting. We continue to expect the RBI to be on a prolonged pause but with risks of a 25 bps rate cut in August if certain conditions are met,” said Pranjul Bhandari, chief India economist, HSBC. Analysts said the MPC might choose to observe the actual progress of the monsoon and the adjustment during the transition to the GST, prior to reducing the policy rate or reversing the stance back to accommodative from neutral.
“We expect the MPC to opt for a pause in the June 2017 policy review. However, the tone of the upcoming policy review is likely to be less hawkish than the April 2017 policy document and the minutes of the MPC meeting, which could lead to some softening of bond yields,” Takkar said. Meanwhile, fourth quarter growth came in at 6.1 per cent, which is at its 9-quarter low.
The more reliable GVA (gross value added) growth also slowed to a mere 6.6 per cent in FY17, a whopping 130 bps lower than the 7.9 per cent growth registered in the previous year. GVA growth in the fourth quarter came in at 5.6 per cent, which is at its 12-quarter low. “This gives credence to the view that economic activity had begun slowing even before demonetisation of high denomination notes in November 2016,” ICICI Securities said in a report.
Will multi-quarter low economic growth nudge the RBI to cut rates in its upcoming monetary policy? The year-on-year CPI-based inflation eased sharply to a series-low three per cent in April 2017, led by food inflation. Moreover, the core CPI-based inflation (excluding food & beverages and fuel & light) declined to 4.5 per cent in April 2017, from 4.9 per cent in March 2017.
Following the record harvests in 2016-17, the improved monsoon prospects have dulled concerns related to the trajectory of food inflation, although the dip in reservoir levels and extent of revision in minimum support prices (MSPs) remain modest inflation risks. The trajectory for food inflation is expected to be relatively benign in the first half of FY18. However, a reversal of base effects could result in food inflation rising sharply to four-five per cent during second half of 2016-17.