Expectations on rate action by major central banks have suddenly turned dovish. A few months ago, the market was factoring in four hikes by the Fed in 2019. However, the minutes of the last meeting and Fed chairman Jerome Powell’s recent guidance on a neutral rate trajectory has reduced expectations of four hikes to just two.

The Reserve Bank of India’s (RBI’s) stance has not been any different. The monetary policy committee (MPC) announced a major shift in policy stance from ‘neutral’ to ‘calibrated tightening’ exactly two months ago.

Today, the street is divided, not on the extent of rate hike, but between the extent of pause and the possibility of even a rate cut, with the growth numbers for the second quarter also being on the lower side.

The MPC’s emphasis, in October, on the need to maintain a “close vigil" on inflation risks, given the output gap, has virtually closed, and several upside risks to inflation persist. Of the several inflation risks flagged by the MPC then, a few have not materialized, while some others have abated.

Most notable is the impact of revision in minimum support prices (MSP): A significant hike in MSP notwithstanding, food inflation continues to be subdued. It has implications for rural demand, also reflecting in national accounts estimates.

Retail inflation remained below the 4% target of the RBI for the third straight month in October, owing to softening in food prices. Inflation for protein-based items, pulses and vegetables were among the lowest.

Core inflation remains largely unchanged and is likely to decline further as crude oil prices and the exchange rate stabilize at lower levels.

After negative trend in foreign portfolio flows for many months, sentiment on India seems to be improving, led by factors here and abroad.

Lower inflation, correction in crude oil price, easing trade tensions and dovish commentary from the Fed seem to have added to the positive view of investors.

However, the monetary policy committee, while acknowledging these positive outcomes, will also be wary of possible fiscal slippage in an election year, even though the government is committed to meeting targets. It is expected to keep on its watch list any possibility of fiscal slippage.

Secondly, geopolitical uncertainties threatening to impact domestic macros once again cannot be ruled out.

Therefore, the MPC is most likely to continue with its ‘calibrated tightening’ stance until the first half of 2019 and review it afterwards based on developing situations.

While rate action is not expected, the outcome of the MPC meeting may have deliberations on liquidity management.

RBI has done multiple rounds of purchase of securities under open market operations (OMO) in recent months and has announced another 40,000 crore of OMO purchases for the current month.

This durable measure has eased market liquidity deficit from 1 trillion to less than 25,000 crore.

Separate measures announced for NBFCs (non-banking financial companies) have also provided comfort to the markets. It is expected that RBI will make a statement on providing more durable liquidity in the fourth quarter, which will provide further succour to the markets.

Nitesh Ranjan is general manager, treasury at Union Bank of India. The views expressed are personal.

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