Will RBI’s monetary policy committee spring a surprise this time?
Food inflation is on the decline, but core inflation remains sticky at 6%-plus. So, a repo hike is out of the question
Conjecturing RBI’s monetary policy action is always interesting for two reasons. First, while we target consumer price index (CPI) of 4%, inflation has always been within this range, yet the decisions taken have been different. Second, the decision is taken by the monetary policy committee (MPC), which has three economists and three economists-cum-practitioners. Therefore, the consensus will always be open to speculation.
Four questions come up every time the MPC meets. First, will the repo rate be changed? The policy document is all-encompassing and always talks of the global and domestic situation, besides providing the latest data on economic variables. The CPI per se is below 4% and not a concern. The threats of inflation in terms of oil price and harvest-cum-MSP have receded. Food inflation is on the decline, but core inflation remains sticky at 6%-plus. Therefore, a repo hike is out of the question. A cut is also not on because the threat to inflation exists, given that the Organization of the Petroleum Exporting Countries (Opec) meets subsequently to decide on output cuts. Commodity prices could also increase, and thereby may have a potential impact on inflation.
Second, what will be the stance? It has normally been “accommodative” or “neutral”. But last time, the lexicon expanded to include “calibrated tightening”. However, since the last policy, all naysayers were checkmated as oil prices rolled back, and inflation came down. Therefore, there can be a return to “neutral”, which is a mid-way path.
Third, will the cash reserve ratio (CRR) be cut? This has rarely been an issue with the policy, given that the CRR has remained unchanged since 2013. But in the last few months there has been a liquidity challenge for the system, which has been weakly denied at times. However, the fact that open market operations (OMOs) have been used regularly means that the preference has been for periodic infusion of funds. The situation still seems to be tenuous given that credit growth has been faster than deposits.
There is a strong case for cutting CRR, which can infuse “permanent” liquidity, as against OMOs which provide “durable” and repo “temporary”, liquidity. A CRR cut would have been a no-brainer under normal circumstances. But given the OMO announcements in December, following those in October and November, there is a 50% chance of a CRR cut of 50 basis points, which can release ₹65,000 crore in the system and ease liquidity and GSec yields.
Fourth, will there be changes in GDP and inflation forecasts for the year? The latest GDP growth number for Q2 of 7.1% is still lower than what was expected; and attaining the 7.4% spoken of by the RBI would mean sustained growth rates of 7.4-7.5% over the next two quarters. This looks doable. Therefore, there would be no change in the GDP forecast for the time being, as consumption and investment trends look steady.
Inflation forecast will, however, be still something to watch out for, though the range of 3.9-4.5% looks inclusive of all options, including oil price revision.
If at all there is a revision, it would be in the downward direction, as risks to the upside looks limited, given the favourable base effect for the next couple of months, and price developments.
There is some speculation on two issues, which grabbed headlines in the last month or so. The one relating to ideological issues with the government will definitely not find a mention. The other relating to NBFCs and liquidity issues will also be skipped, as the relevant measures have already been announced over the last couple of months in a calibrated manner. Therefore, the statement on development and regulatory policies will concentrate on other issues.
In short, a CRR cut could be the surprise element this time.
Madan Sabnavis is chief economist at CARE Ratings. The views expressed are personal.