With red flags on inflation and rupee, RBI may stand pat on rates

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Madhuchanda Dey
Moneycontrol Research

With macro indicators turning grimmer by the day, there is mounting pressure on the Reserve Bank of India to reduce rates when the MPC (Monetary Policy Committee) delivers its verdict tomorrow.

In the last MPC meeting in August, the RBI was hawkish but it still came up with a token rate cut. But with macro turning worse and inflation rearing its ugly head, MPC members will have to strike an even more difficult balance, although going by experiences of past rate actions, a rate cut appears to have lost its desired efficacy.

Hence, status quo is what is expected from RBI alongside a downward revision to growth forecast. The tone and commentary assumes far more importance than the action. Markets would, therefore, continue to look to the government to lift the fast-declining sentiment.

The deadly combo – stagflation?

The worst nightmare of any central bank appears to be unfolding now. After the last policy, none of the data points seems to have lent incremental comfort.

The growth in GDP at 5.7 percent in the first quarter of FY17 is not the last piece of worrisome news. Looking purely statistically, the growth in the second quarter of FY17 was strong thereby not providing the right base for Q2 FY18. On-the-ground checks suggest significant disruptions on account of GST. So, the coming quarter is unlikely to show any reversal.

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