RBI may maintain status quo, change policy stance to neutral, shows survey
RBI did not elaborate on the reasons for the change in timing for releasing its sixth bimonthly policy statement
The Reserve Bank of India (RBI) on Monday said that it will release its sixth bimonthly policy statement before noon on 7 February, signalling a shift from the last two years.
“The Monetary Policy Committee (MPC) will meet during 5 to 7 February 2019, for the sixth bimonthly monetary policy statement for 2018-19. The resolution of the MPC will be placed on the website at 11.45AM on February 7, 2019," the RBI said in its press release.
The central bank did not elaborate on the reasons for the change in timing. In September 2016, just ahead of the then governor Urjit Patel’s first policy review, the RBI had decided to change the timing of announcement to mid afternoon.
Come Thursday, a majority of bank treasury heads surveyed by Mint expects RBI to announce a status-quo policy, while changing the policy stance from calibrated tightening to neutral. However, some bankers are not ruling out a 25 basis points (bps) cut before the upcoming general election. Falling inflation, along with an expansionary budget, could push the RBI to maintain the policy rates unchanged, said a section of bankers.
“We expect a change in stance on the expectation that inflation stayed below 4%. They will buy some time to figure out a rate cut. RBI will also give assurances on continuance of OMOs (open market operations)," said Harihar Krishnamoorthy, head of treasury, FirstRand Bank Ltd, India.
Since the last policy in December, consumer price inflation has eased to 2.19%, while core inflation, which excludes volatile items such as food and fuel, has remained stubbornly high at 5.7%.
In the previous policy, the MPC had slashed its inflation projection from 3.9-4.5% to 2.7-3.2% for the second half of the current financial year, citing a sharp fall in crude oil prices and food “deflation".
Separately, credit growth has declined for the second fortnight in January, despite improvement in credit to non-banking financial services post the IL&FS crisis. Global growth is also 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 due to the 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).
The Central Statistics Office’s (CSO’s) full-year estimate suggests the economy may grow at 6.75% in the second half (October-March), against 7.75% in the first half (April-September). While the recently announced budget revised the fiscal deficit marginally higher to 3.4%, it also raised fears of a potential fiscal slippage due to higher expenditure proposals outlined in the budget. “There is a fiscal deficit breach in the current fiscal leading to extra borrowings of ₹36,000 crore, which led to yields rising by 15bps. Also the non-adherence to medium-term fiscal policy has led to a situation where it seems an expansionary budget could put further pressure on yields. There has been a shortfall in capital receipts also in addition to the tax revenues complicating the fiscal math. In addition to the extra borrowings, 25% increase in gross borrowing next year will also put pressure on yields. In view of the expansionary fiscal policy, the probability of rate cut in the February policy have receded," said Manish Wadhawan, managing director and head-fixed income, global markets, HSBC.
In the current fiscal year so far, the RBI has raised the policy repo rate twice by 25bps each—from 6% to 6.25% in the June monetary policy review and from 6.25% to 6.50% in August, 2018. It changed the monetary policy stance from ‘neutral’ to ‘calibrated tightening’ in the October policy.