Against the backdrop of fiscal slippages, rising oil prices, shooting US treasury yields and pressure on inflation, none could have expected a better monetary policy than what Indian central bank presented on Wednesday. It has left its policy rate unchanged at 6% even as the stance remained neutral.
The tone of the policy is cautious, but less hawkish than what most analysts were expecting. The bond market cheered the policy with yields dropping across maturities.
The key takeaway from the policy document is the view of the monetary policy committee that “the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management". Clearly, the Reserve Bank of India (RBI) will not be in a hurry to hike rate at the juncture when Indian economy is on a recovery path and there are early signs of a revival of investment activity.
On expected lines, RBI has raised the inflation projection for fiscal year 2019. From 4.3%-4.7% in the second half of current fiscal year, it has been raised to 5.1-5.6% in the first half of 2018-19, keeping in mind the rise in international crude oil prices as well as prices of non-oil industrial raw material.
However, the projection for the second half of 2018-19 is sharply lower—4.5-4.6% on account of strong favourable base effects and a likely softness in food inflation, assuming we have normal monsoon and the government takes care of the supply-side management.
Indeed, the projected inflation has upside risks but at least theoretically, RBI is not in favour of a rate hike even if inflation touches 5.6% in first half; since it is expected to go down in the second half, the possibility of a rate hike this year seems to be slim at this point.
Of course, things can change both globally as well as on the domestic front but one thing is for sure that RBI is not in a hurry to hike the policy rate. This has soothed the frayed nerves of the bond dealers. Even though deputy governor Viral Acharya has made it clear that the central bank would not intervene to bring down the bond yield and there is no liquidity scarcity in the market, the stance and the language of the no-action policy will stabilize the bond market.
One way of looking at the policy would be that RBI is buying time before a rate hike as there are too many upside risks to inflation which will unfold gradually—ranging from higher oil and other commodity prices to hike in minimum support prices for certain crops, the increase in customs duty as well as fiscal slippages in 2017-18 as well as 2018-19. However, even if the rate hike happens, it won’t happen too soon. To that extent, RBI has given a reasonably longer-term guidance.
From the language of this policy, it seems that the Indian central bank will hold on to the current policy rate at least at the next two monetary policy committee meetings. The rate can go up in the second half if inflation projection is revised upward steeply.
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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