Nobody could have asked for a less hawkish monetary policy, the first in fiscal year 2019. Bond prices rose (and yields dropped) and the bank stocks had a good day on bourses as the markets firmly believe that the next rate hike is quite some time away.
The bar for a rate hike now is far higher than in February, when the monetary policy committee (MPC)—the Reserve Bank of India’s (RBI’s) rate setting body—last reviewed the policy. At that time, it had left the rate unchanged at 6% with a cautious tone.
As everybody expected, once again, on Thursday, MPC left the policy rate unchanged and kept the stance of the policy neutral but the tone of the policy is decidedly less cautious than in February. And the icing on the cake is a cut in inflation projection.
In February, the Reserve Bank of India (RBI) raised the inflation projection from 4.3-4.7% in the second half of fiscal year 2018, to 5.1% in the January-March quarter. For the first half of 2019, inflation was projected at 5.1-5.6% but for the second half of 2019, the projection was lower—at 4.5-4.6% with upside risks.
With retail inflation averaging 4.8% in January-February on account of a sharp decline in vegetable prices, among other things, the inflation projection for the last quarter of 2018 has been brought down by 60 basis points to 4.5%. One basis point is a hundredth of a percentage point.
Similarly, the inflation projection of the current fiscal year 2019 has also been revised downwards marginally—4.7-5.1% in the first half and 4.4% in the second half. This is after factoring in the impact of house rent allowances for central government employees under the 7th Central Pay Commission.
Excluding that, inflation projection is even lower—4.4-4.7% in the first half and 4.4% in the second half of 2019. This projection is despite the volatility in crude oil prices. After softening in February from multi-year high on increased production in the US, crude prices started hardening in the second half of March.
Indeed, there are many upside risks to the inflation projection. They include a potentially higher minimum support price of farm produce, the staggered impact of housing rent allowance increase by several state governments, insufficient monsoon and a potential fiscal slippage of the central as well as the state governments, beside the volatility in crude prices. However, RBI seems to be less rigid in appreciating the change in the inflation trajectory and more confident both on its reading of inflation trend as well as economic growth.
The February meeting of the MPC took note of the “nascent recovery" in Indian economy which needed to be “carefully nurtured"; it had also said that the growth should be “put on a sustainably higher path through conducive and stable macro-financial management".
Two months down the line, the MPC, taking note of the so-called high-frequency indicators such as sales of commercial vehicles, air passenger traffic, foreign tourist arrival, among others, has seen “a further strengthening of demand conditions". While the growth in sales of two-wheelers and tractors reflect buoyant rural consumption, a 19-month high capital goods production in January is indicative of the rise in investment demand. Bank credit too has been growing.
As a result of all these, RBI has projected economic growth to rise from 6.6% in 2018 to 7.4% in 2019—in the range of 7.3%-7.4% in the first half and 7.3%-7.6% in the second half—“with risks evenly balanced".
Barring unforeseen developments such as a full-scale trade war or a huge spike in the crude price or a horribly deficient monsoon, one can expect the Indian central bank sticking to its current policy rate for months to come. The stance may change post August but the rate hike, if at all, may have to wait till the second half of fiscal year 2019—if any. Last Monday’s Banker’s Trust column had already indicated that.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. His latest book, From Lehman to Demonetization: A Decade of Disruptions, Reforms and Misadventures has recently been released.
His Twitter handle is @tamalbandyo.
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