The Reserve Bank of India’s Monetary Policy Committee under its new chairman Governor Shaktikanta Das will announce its policy decision on Thursday. The market will keep a close watch on the governor’s statement to see if he is a hawk or a dove. With the majority expecting the MPC to keep rates unchanged, Mint takes a look at the five things that could be on the rate-setting committee’s radar.
1) What will be the MPC’s rate action?
The MPC is expected to keep the policy repo rate on hold due to the persistent fall in inflation and the expansionary budget. A Mint survey of bank treasury heads revealed that the majority expect the RBI to maintain the status quo with a change in stance to neutral. The remaining expect a cut in the repo rate by 25 basis points. This is line with the findings of a Bloomberg survey which showed that 30 of 38 economists expect the RBI to keep the repo rate on hold, while eight expect a 25 bps cut. In the previous policy, former RBI governor Urjit Patel had said that there is a possibility of a rate cut if upside risks do not materialize.
2) Will the MPC revise its inflation target?
Since the last policy in December, consumer price inflation has eased to 2.19%, undershooting the MPC’s projection of 2.7-3.2% for the second half of the current financial year. Core inflation, which excludes volatile items such as food and fuel, has, however, remained stubbornly high at 5.7%. Oil prices have remained unchanged compared with levels seen around the December policy. The MPC could also take note of the expansionary budget and the potential impact of increased rural spending on inflation. The interim budget has proposed a relief package of ₹75,000 crore under which the government will transfer ₹6,000 per year to farmers who own up to 2 hectares of land.
3) What are the growth concerns before the MPC?
Until now, the MPC has remained sanguine about domestic growth prospects. The major driving force for the economy has been the public sector entities, which have outpaced the government in capital expenditure. However, the government is being criticised for spending too much money on revenue expenditure that leaves little money for creation of capital assets. On the global front also, growth is expected to slow down due to trade tensions between the US and China and tighter financial conditions. The International Monetary Fund cut its world economic growth forecast for 2019 and 2020 citing weakness in Europe and some emerging markets. Domestic gross domestic product growth decelerated faster than anticipated in the second quarter (July-September) to 7.1% from 8.2% in the first quarter (April-June).
4) Will the RBI highlight issues related to NBFCs?
Risks to financial stability have increased, with non-banking finance companies in a liquidity crisis following defaults by Infrastructure Leasing and Financial Services. Recent allegations raised by Cobrapost that Dewan Housing Finance Ltd (DHFL) diverted ₹30,000 crore loans could also have a negative impact on the housing finance sector. Credit growth has, therefore, slowed down with NBFCs and HFCs slowing down disbursements. While the liquidity crunch has eased, concerns still remain about the repayment ability of some of these players and their asset liability management.
5) Will the MPC statement flag concerns about the fiscal deficit?
The interim budget pegged the revised fiscal deficit for 2018-19 at 3.4% of GDP, against the initial target of 3.3%. While the slippage is marginal, risks of future slippages cannot be ruled out and may prevent the RBI from cutting rates. The budget raises serious doubts about India’s ability to narrow the deficit to 3% of GDP by 2020-21, which the government has committed to in the Fiscal Responsibility and Budget Management Act. Rating agency Moody’s said the unexpected fiscal profligacy could lead the RBI to contemplate a slower path to monetary easing than warranted.