Mumbai: The Reserve Bank of India’s monetary policy committee will announce its policy decision today. With the market expecting a 25 basis points rate cut, Mint takes a look at the 5 things that could be on the MPC’s radar.
What could be RBI’s likely rate action?
The Monetary Policy Committee of the Reserve Bank of India is likely to cut interest rates for the sixth straight time, despite a surprise spike in inflation. Eight out of 10 economists and treasury heads surveyed by Mint expect RBI’s monetary policy committee (MPC) to cut the repo rate, at which RBI lends to banks, by 25 basis points (bps) to 4.9%, while maintaining an accommodative stance. Two expect the RBI to cut rates by 15 bps. Economists however remain divided over whether this could be the last rate cut before the end of fiscal year 2019-2020. Hence the market will be keenly watching for any commentary on the possibility of further rate cuts in the next policy in February.
Will RBI change its outlook on growth?
Economic growth has slowed to 4.5% in the September quarter, its weakest pace since 2013, despite a cumulative 135 bps cut in policy rates this year. Despite the monetary stimulus thus far and a slew of government measures to boost the economy, economists do not expect an immediate recovery in growth momentum. Tight credit condition resulting from a slowdown in credit growth to sub 8% year on year is also expected to hinder transmission. Many economists expect RBI to revise GDP growth forecast downwards to around 5-5.5% from the earlier forecast of 6.1% for the current fiscal year.
Will RBI change its outlook on inflation?
Consumer price inflation quickened to 4.62% in October, breaching the 4% target for the first time since July 2018. While vegetable prices have started stabilizing, onion prices are expected to remain high. Core inflation (non-food and fuel) saw a drop due to base effect and is expected to rise over the next months. While crude prices have remained largely steady in the first half, risks of supply side shock to crude remain. In its October policy, RBI had projected CPI inflation at 3.5-3.7% for the second half of fiscal year 2019-20. Many economists expect RBI to revise inflation forecast upwards to 4-4.5%.
What will be RBI’s views on credit growth?
Credit growth continues to be weak with bank non-food credit growing below 8% and loan sanctions by non-banking finance companies falling by 34% in the July-September quarter. Even the loan melas organized by public sector banks under the directive of the government failed to make any significant difference to push retail loan growth. RBI’s professional forecasters’ survey has projected bank credit growth at 12% for fiscal year 2019-20 and 12.9% for fiscal year 2020-2021. While liquidity remains intact with banks parking as much as ₹3.04 trillion with RBI, lack of availability of funding remains a challenge. Will the central bank offer any solutions to ease this logjam? The market will be keenly watching.
What will be RBI’s view on unconventional measures to revive growth?
Reports suggest that the government is mulling a mini version of the troubled asset relief program similar to the US in order to alleviate the stress in the financial and real estate sector. Finance ministry along with RBI are discussing a new scheme to unburden stressed assets from top 25 NBFCs and also restructure the debt of real estate companies. This comes after the government took over the operations of Infrastructure Leasing and Financial Services (IL&FS) after it defaulted on its interest payments. Recently, RBI superseded the board of DHFL and referred it for insolvency process. In the minutes of the October Policy, some of the MPC members had felt that monetary easing could not be the only answer to reviving a slowing economy. It’d be interesting to see whether the MPC agrees to undertake any unconventional measures along with the government.