The headline inflation is lingering below central bank’s projections, crude oil prices are stable, domestic growth momentum is slowing and global rate cycle is peaking out which gives enough room to the MPC to change its stance and possibly go for a rate cut.
The Monetary Policy Committee (MPC) in the forthcoming policy review on February 7, 2019, could change its stance from ‘calibrated tightening’ to ‘neutral’ and also may go for a rate cut, Edelweiss Securities said in a note.
The headline inflation is lingering below central bank’s projections, crude oil prices are stable, domestic growth momentum is slowing and global rate cycle is peaking, which gives enough room to the MPC to change its stance and possibly go for a rate cut.
In its previous policy meeting, the RBI had indicated that in case upside risks to inflation do not materialise, there would be room for appropriate action.
“That said, what could hold RBI’s hand this time is its desire to avoid a knee-jerk change in stance from ‘calibrated tightening’ to a rate cut. Also, and more importantly, it may want to tread cautiously for now as core inflation remains elevated,” added the note.
As regards the latter, Edelweiss believes that pricing power in the economy is still weak and input price pressure has eased. Thus, core inflation should moderate in the coming months. “Hence, the case for a rate cut remains strong with a good possibility in February, but certainly in April,” it said.
Headline inflation readings have been consistently undershooting RBI’s expectations led by food inflation, which is currently running at -1.5 percent on a YoY basis after averaging under 2 percent over the past two years.
In the previous policy review, the central bank did hint that in case upside risks to inflation do not materialise, there could be a case for appropriate action. At the same time, the global backdrop has also changed.
“The US Fed has taken a decisively dovish turn in the past two months, indicating that global rates have peaked out. Finally, domestic growth momentum has also moderated. All this calls for easier monetary policy,” added the note.
However, what could hold RBI this time is the backdrop of rising core inflation, suggested the note. The core inflation (ex-commodities) has been hovering in an elevated range of 5.5-6.0% over the past several months.
Also, to a lesser extent, it may not want to move in a knee-jerk fashion from ‘calibrated tightening’ to a rate cut.
“As regards the former, we do believe that given weak pricing power in the economy and easing of input prices, pressure on core inflation should moderate in coming months,” it said.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.