Moneycontrol
Dec 06, 2017 09:04 AM IST | Source: Moneycontrol.com

MPC policy preview: RBI likely to maintain status quo with a cautious stance

The cyclical recovery in growth, although only gradually, is likely to reduce the challenge on the MPC’s front as they get assured of improvement going ahead.

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Upasna Bhardwaj

Kotak Mahindra Bank

As we approach the monetary policy committee (MPC), we again deep dive into factors that will be crucial in the decision making.

First thing first, with MPC being inflation focussed, we delve into the underlying factors determining the trajectory in the months ahead.

CPI inflation is on an expected upward path as adverse base effect, mean reversion of food prices and the full impact of 7CPC HRA continues to seep in.

Upasna Bhardwaj
Upasna Bhardwaj
Senior Economist|Kotak Mahindra Bank

The Reserve Bank of India (RBI) in the previous policy had stated that they expect 2HFY18 inflation to range between 4.2-4.6%, as against the range of 1.5-3.5% seen in 1HFY18.

Our own estimates suggest that retail inflation is inching towards 4.5 percent by March 2018 (4.3% without HRA). Excluding HRA, the core inflation continues to get weighed by the adjustment to higher GST rates on few service segments even as the underlying demand-side pressures still don’t seem to suggest any upside risk.

The Core inflation in the last two months has been sticky and is stable around 4.4 percent. Of course, the pass-through of the latest GST rate cut is expected to provide a marginal relief (as and when) but higher commodity prices have sharply increased the upside risk.

Crude oil prices have increased nearly 14 percent since the previous policy with the broader commodity index up by 5 percent. Our estimates suggest that for every USD 10/bbl increase in oil prices, CPI inflation could inch higher by 60-65bps.

Against the adverse inflation environment, the noises around a likely fiscal slippage are further complicating the matters. Notably, the fiscal deficit until October has already hit 96.1 percent of the budgeted numbers given the heavy frontloading of government spending and slower pace of revenue collections.

Teething issues with GST implementation (like delays in tax credits and tax filing along with technological issues) is clouding the tax collections scenario.

Lower surplus transfer by the RBI to the tune of around Rs300 bn has further increased the risks of revenue slippages. An additional shortfall of Rs 300-350bn from excise duty cuts on petroleum products and spectrum proceeds could create a receipt s gap of nearly Rs 1 tn.

While higher divestments and special dividend proceeds may partly offset the shortfall, risks still remain high.

Meanwhile, the 2QFY18 GDP prints accelerated to 6.3 percent from 5.7 percent in the previous quarter reversing the 5-quarter falling trend.

The cyclical recovery in growth, although only gradually, is likely to reduce the challenge on the MPC’s front as they get assured of improvement going ahead.

We thus expect MPC to pause in the upcoming policy meeting with a probable hawkish-cautious bias given that inflation prints have been trending higher and are likely to begin overshooting their mid-point target of 4% in the months ahead.

The risk to RBI’s estimated inflation trajectory has further surmounted given the surge in crude oil prices. Given that MPC members are fixated with anchoring 4 percent inflation target and the upside risks emanating from higher oil prices, higher rural real wages, sticky core inflation and mean reversion of food prices, we find limited room for any further monetary accommodation this year.

Disclaimer: The author is Sr. Economist at Kotak Mahindra Bank. The views and investment tips expressed by investment experts on moneycontrol.com are her own, and not that of the website or its management.

tags #Economy

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