RBI Policy: Four things to watch out for2 min read . Updated: 06 Feb 2020, 10:03 AM IST
- MPC is expected to keep policy rates unchanged at 5.15%
- In December, MPC cut FY20 GDP forecast to 5% and raised retail inflation forecast to 5.1- 4.7% for fiscal second half
The Reserve Bank of India’s Monetary Policy Committee will announce its policy decision on Thursday. With the market expecting a status quo policy, Mint takes a look at the four things that could be on the MPC’s radar.
What could be RBI’s view on rate action and stance?
The Monetary Policy Committee of the Reserve Bank of India is expected to keep policy rates unchanged at 5.15% at its meeting on Thursday owing to rising inflation. None of the 10 respondents—bankers and economists—expect MPC to cut rates before June. All 10 were unanimous that the MPC will maintain an accommodative stance as long as necessary. The market though remains divided over whether there will one rate cut of 25 basis points or 50 basis points in the next financial year. The market will keenly watch for MPC’s commentary on the possibility of further rate cuts and also the voting pattern of the new MPC following the induction of RBI executive director Janak Raj.
Will RBI change its outlook on growth?
In December, the MPC had revised the GDP growth projection for FY20 to 5% from 6.1% earlier. This was in line with advance estimate released by the Central Statistics Office’s (CSO) which pegged GDP growth rate at 5%. The revised GDP data indicates an implicit growth of 5.7% for FY20. The Economic Survey has pegged economic growth at 6-6.5% for FY21. Economists though expect growth to be much lower at 5.9-6.35% for next year. While expectations were high that the budget would boost spending to pump-prime the economy hit by sluggish private investment and consumption demand, the budget’s impact on growth may be minimal.
Will RBI change its outlook on inflation?
In the December policy, MPC had raised retail inflation forecast to 5.1- 4.7% for the second half of this fiscal from 3.5-3.7%, and pegged inflation for the first half of the next fiscal at 4.0-3.8%, with risks broadly balanced. Prices of some vegetables have reversed and crude prices have corrected. However, retail prices of pulses and oilseeds have seen an uptick. Telecom tariff hike, rail hike and base effect are likely to push up the core-CPI inflation. With inflation numbers expected to stay above 7% in January and above 6% till June, bankers and economists polled expect MPC to maintain the inflation forecast and also go for an extended pause with continuance of the accommodative stance.
What will be RBI’s view on the budget?
Central bank governor Shaktikanta Das, in his speech in January, had made it clear that monetary policy has its limitations to achieve these objectives and that there is a need for structural reforms and fiscal measures to revive consumption demand and overall growth. With the Budget having failed to meet some of these expectations, economists have termed it a contractionary budget. The revised estimates for the current year from the budget indicate that the government has refrained from heavy spending. The slippage in fiscal deficit of 0.5% of gross domestic product (GDP) is largely due to lower tax revenue growth. The increase in spending for FY21, too, is at a modest 13%, with an indication of bringing down the fiscal deficit to 3.5% of GDP. Economists, therefore, expect the governor to be unperturbed by the FY20 fiscal slippage as it is non-inflationary.