All eyes on RBI today amid growth slump, trade woes, geopolitical tensions

The Reserve Bank of India (RBI) is expected to deliver a 25 basis points (bps) cut in its repo rate on Wednesday, the fourth in a row since Shaktikanta Das took over as the governor in December last year.

Among things that will shape the decision of the monetary policy committee (MPC), the rate setting body, will be the economic slowdown, low inflation and geopolitical tensions.

On India’s growth forecast

The central bank is likely to further lower its GDP forecast for FY20, over and above the 20 basis points (bps) cut to 7% it made in the June policy. A slowdown in consumption demand, government spending and the lack of quality jobs have resulted in India’s growth slowing down. The International Monetary Fund on 23 July lowered India’s gross domestic product (GDP) growth rate for FY20 to 7% from 7.3%, citing poor demand conditions. GDP growth in the fourth quarter of FY19 slowed down to 5.8% from 6.6% in the previous quarter, the slowest quarterly GDP growth rate in five years. Moreover, eight infrastructure sectors, which constitute 40.27% of the index of industrial production, grew just 0.2% in June.

Monetary policy stance

The RBI is expected to retain its accommodative stance in the August policy, and economists and treasurers believe its commentary will turn more dovish. Harihar Krishnamoorthy, head of treasury operations at FirstRand Bank, said that since the liquidity surplus is at ₹1.5- ₹2 trillion, the central bank might say it has pumped in enough liquidity and will continue to do as much as needed.

According to RBI data, the system liquidity stood at a surplus of ₹2.13 trillion as on 5 August. The central bank could also release its liquidity management framework after it set up a working group to simplify the current framework.

On inflation

While inflation as measured by the consumer price index (CPI) rose to 3.18% in June, it remains below RBI’s medium-term target of 4%. However, the trajectory of inflation in India depends substantially on the monsoon as food prices have a 46% weightage while calculating CPI.

In the June policy, the MPC had revised its inflation forecast to 3-3.1% for the first six months of FY20 and to 3.4-3.7% for the second half. According to Aditi Nayar, principal economist, Icra, the unsatisfactory distribution of the monsoon has delayed kharif sowing, which may negatively impact yields and food prices.

Global factors influencing MPC’s decision

The MPC will also consider the current global scenario to arrive at a decision. These include the ongoing trade war between the US and China which has escalated since the last MPC meeting in June. The latest round includes a fresh set of tariffs slapped on Chinese goods by the US. Meanwhile, the US has also labelled China a currency manipulator, a move largely seen as symbolic by experts amid the ongoing trade war.

Other uncertainties are in the form of tension in the Strait of Hormuz that threatens to disrupt global oil supply and the possibility of a no-deal Brexit.

Other measures expected

In the backdrop of a liquidity crunch at non-banking financial companies (NBFCs), the Union budget announced a partial guarantee programme for banks purchasing pooled assets from non-banks. Bankers expect the RBI to give some clarity on this as they are uncertain about the working of this credit guarantee scheme.

Another expectation from the central bank is further revision of its prompt corrective action guidelines allowing the remaining banks functioning under this scheme to start lending.