Banking Central| MPC has all the reasons to pause, again. But what’s next?

If inflation sticks to the trajectory, some economists expect the MPC may have room for rate cuts by end of the year.

India’s Monetary Policy Committee (MPC), the panel which sets interest rates, will begin the three-day review meeting on June 6 to decide the next course of action. The decision will be announced on June 8.  Since the last monetary policy review, the six-member panel has got some encouraging data inputs in terms of inflation and growth numbers.

Economic growth remains resilient despite back-to-back interest rate hikes since May last year. Inflation has started easing, although some risks persist. This means that for the MPC, which went for a pause last time (April review) despite relatively higher inflation numbers and in the backdrop of a US banking crisis, there are enough reasons to hold this time.

Growth numbers

The panel will possibly signal the markets that it would wait and watch to see the actual impact of how the previous rate hikes are playing out.

Banking Central

Growth numbers have come better than expected in the March quarter at 6.1 per cent beating economist consensus by a large margin and somewhat assuring policymakers that Indian recovery is clearly on track. On the other hand, retail inflation rate has dropped sharply for the second month in a row, hitting an 18-month low of 4.70 percent in April, yet still far from the 4- per cent target.

But, it is too early to lower the guard on inflation fight. The biggest risk to inflation will be how the El Nino factor plays out and the trajectory of core inflation in the approaching months. Core inflation has eased of late but still remains above the desired levels of central bank.

In this backdrop, the likely approach of the MPC in this context will be to stay on a long pause mode till there are clear signs of inflation easing to the target-level in a sustainable manner. If inflation sticks to the trajectory, some economists expect the MPC may have room for rate cuts by end of the year.

Will the stance change?

While a pause on rates is given in the June meet, what will be more interesting to watch will be the change in stance, which continues to be 'withdrawal from accommodation'. The MPC has continued with the stance for a long time despite disagreements within the panel itself about the rationale.

In the last policy review, Jayanth Varma, one of the MPC members, had questioned the continuation of stance, arguing that at 6.5 per cent repo rate (the rate at which the RBI lends short-term funds to banks), the rate has already been hiked to the level prevailing at the beginning of the previous easing cycle in February 2019.

Hence, no further “withdrawal of accommodation” remains to be done, Varma said. In this backdrop, will the MPC may change the stance from ‘withdrawal of accommodation’ to ‘neutral’ that would signal the markets that the MPC can act either ways (pause, cut)? One needs to wait and watch.

The second factor to watch will be the change in inflation target from 5.2 per cent in the April policy.

There is a likelihood that the panel will revise the target downward, considering the recent easing trend in inflation numbers. Apart from these two elements, the policy announcement this week is likely to be largely a non-event.