RBI policy decision today. 5 things to watch out for

What will be MPC’s rate action and stance?

Of the 10 economists and treasurers polled by Mint, nine expect the monetary policy committee to cut the benchmark repo rate by 25 basis points to 6%, as inflation continues to undershoot the central bank’s targeted trajectory and growth continues to be hit due to a global slowdown. One among them was of the view that the MPC could go for a reduction of 50 basis points. The poll was, however, divided when asked if the RBI's monetary policy committee (MPC) will change its policy stance. Half of those polled expect the RBI to change its stance to accommodative from neutral and the other half expects it to maintain the neutral stance. Majority expects another round of rate cut before the end of the fiscal year.

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Will the MPC revise its inflation target?

Inflation concerns seem to have reduced with food prices continuing to be in deflation mode for the fifth consecutive month, and core inflation softening to 5.5%. India’s headline CPI inflation rose to 2.6% in February, reversing a declining trend since July 2018. Majority of bankers and economists polled expect inflation to settle below 4% in 2019-2020, with a few expecting it to inch up to 4.10%. In February, the MPC had revised its consumer price index-based inflation projection for the first half of the next fiscal year to 3.2-3.4% from 3.4-4.2% earlier, and fixed the third-quarter inflation forecast at 3.9%. It had, however, ignored the impact of both high core inflation —waiting to see whether the underlying reasons (such as elevated costs of education and healthcare) were secular in nature — and an expansionary fiscal policy.

Will the MPC revise its growth target?

Declining growth is a matter of serious concern due to a fall in employment generation and slowdown in industrial activity. India’s gross domestic product (GDP) growth slowed to a five-quarter low of 6.6% in the December quarter and is expected to further slow to 6.4% in the March quarter. Bank treasurers and economists polled by Mint are unanimous in their view that the MPC will pare down their forecast to 7-7.25% for 2019-20. Goldman Sachs, however, believes there will be some pick-up in growth over the course of this year, and forecast real GDP growth to increase from 7.1% in 2018-19 to 7.5% in 2019-20.

What are the external factors before the MPC?

Since the previous policy, risks to global growth have increased with rising trade tensions and tighter financial conditions. International Monetary Fund (IMF) director Christine Lagarde said on Tuesday that the global economy was still "unsettled" after two years of steady growth, with the outlook "precarious" and vulnerable to trade, Brexit and financial market shocks. In January, the IMF cut its global growth forecast for 2019 to 3.5% from 3.7%. Many central banks, including the US Federal Reserve and the European Central Bank have signaled that rates would be held at current levels through 2019. Oil prices are higher by 8.5% compared to the previous MPC meeting. Economists expect brent crude prices to taper to $60 per barrel over the next 12 months as new pipelines release low-cost US shale oil into the global oil market.

What are the other miscellaneous policy developments that the RBI could announce?

The market will watch out for commentary from RBI governor Shaktikanta Das on the 12 February circular which was struck down by the Supreme Court, citing that the central bank acted beyond its powers. In the coming days, the RBI is expected to come out with new rules on debt restructuring framework. Any remarks on the dollar-rupee swaps that the central bank had announced to infuse liquidity into the market will also be closely watched. The market will also look for the governor’s comments on monetary policy transmission and whether enough has been done by banks to pass on the rate cuts.