The RBI again chose to leave its key policy rate unchanged in this fiscal’s first monetary policy review. The Monetary Policy Committee or the MPC has preferred to maintain a neutral stance well in line with market expectations. With actual inflation having moderated, averaging 4.8 per cent in January-February, and food prices evening, the MPC has said the inflation trajectory in the first half of 2018-19 is expected to be lower compared to the assessment in February even if there is a spike in food prices. This pre-supposes a normal monsoon and supply management by the government and discounts the volatility in global crude oil prices.
The MPC has now lowered its CPI inflation projection, which will surely be welcomed by the market coming soon after the RBI eased the rules on provisioning for mark-to-market for bond holdings of banks. A lower inflation forecast will mean a receding of the earlier threat of interest rate hikes for a while at least, with the yield on ten-year bonds having risen by 125 basis points over the past year, brightening the prospects of a lowering of borrowing costs at least in the near term.
For the government, the largest borrower in the market, that should be welcome. The other positive is the outlook on growth with the RBI too appearing to share the assessment of the IMF, the World Bank and other economic forecasters that growth is on the upswing — the GDP is projected to grow at 7.4 per cent in FY19.
Recent economic indicators point to a recovery in sight: Capital goods production is at a 19-month high, two-wheeler sales are rising, airline traffic is reporting robust growth, services sector is showing resilience and there is improved demand for retail loans. Yet, there are worry lines. Exports, one of the engines of growth, have weakened and private investment is yet to pick up. Hence, it may be early to celebrate the green shoots or signs of a recovery.
The sobering fact is even after taking a projected growth of 7.4 per cent this fiscal, the average growth over the last five years is only a little over 7 per cent. It only shows that policymakers are far from meeting the challenge at hand, which is to repair the balance sheets of banks, improve their governance and more importantly, ensure that private investment is back on track.