Beena Parmar Moneycontrol News
A unanimous status quo in key policy interest rate is expected on December 5, the last day of the 14th meeting of the Monetary Policy Committee (MPC). Its commentary on the interest rate and outlook on the policy stance and liquidity will be keenly watched by the market, most experts said.
If expectations come true, the six-member MPC, after a three-day meet, will keep the repo rate unchanged at 6.5 percent. Repo rate is the rate at which banks borrow short term funds from the Reserve Bank of India (RBI).
The resolution of the fifth bi-monthly monetary policy statement for 2018-19 will be placed on RBI website at 2.30 pm on December 5.
“We are expecting a pause (in interest rate) given the current economic environment. What would be of significance is, will the RBI soften its stance or reword its 'calibrated tightening' as the forthcoming inflation prints are likely to remain below RBI target. This could prompt RBI to review its policy stance (to neutral)… They may do it in this policy or create a way for the next policy to shift to neutral," said Shubhada Rao, Chief Economist at Yes Bank.
Surprise 'pause' and 'calibrated tightening' in October Despite a surprise pause in October, the MPC, headed by RBI Governor Urjit Patel, had changed its policy stance to 'calibrated tightening' ruling out further rate cuts.
In a highly volatile and dynamic global environment, domestic factors such as appreciation in the rupee, easing oil prices and subdued inflation can keep the focus on its policy stance.
According to Shubhada Rao, 'calibrated tightening' and lower inflation do not go in sync. "We should wait for change in language and tone from the central bank. Hence, more tightening probably is ruled out this fiscal,” she explained.
Rupee strengthens; oil, inflation and growth decline Two months after the October 5 monetary policy, the rupee has returned to 69 levels after touching a low of 74.22 to the dollar.
Crude oil prices have declined 30 percent since then to $58 levels from $84 per barrel.
Yields on the 10-year benchmark government bonds have also declined sharply to 7.62 percent from 8.05 percent (on October 5).
Further, inflation has cooled off to a 13-month low of 3.31 percent, well below RBI's medium term inflation target of 4 percent for the third straight month.
Despite improvement in credit growth in the banking sector at 14.9 percent till early November, GDP growth slowed to 7.1 percent in the September quarter amid continued worries of the fiscal deficit target shooting 3.3 percent of GDP.
Most experts project a further downward revision in inflation numbers going forward.
“We are looking at a pause on December 5 and rest of FY19, with a downward revision in inflation (prevailing trend is 50-60 bps below the central bank’s forecast) and lower full-year growth estimate,” said Radhika Rao, Economist at DBS group.
In the previous policy, MPC had also lowered its inflation trajectory to 3.9-4.5 percent in H2 FY19 and 4.8 percent for Q1 FY20.
However, it had also flagged key risks to domestic prices from volatile global financial markets, surging oil prices and possible fiscal slippages in the run-up to elections—five states hold assembly polls before general elections next year.
A recent Kotak report estimates inflation at 2.9-4.3 percent in H2 FY19 and 4.5 percent in Q1 FY20. It expects MPC to maintain its 'calibrated tightening' stance "until core inflation reduces to around 4-4.5 percent on a sustained basis.”
Liquidity Radhika Rao feel commentary on liquidity and the tone of the policy would be important.
Amid the ongoing tight liquidity conditions, RBI could infuse more liquidity into the system through tools such as purchase of open market operations (OMOs), extension of facility to avail liquidity for Liquidity Coverage Ratio to non-banking financial companies (NBFCs), use of long-term repo windows and foreign exchange intervention given the appreciation in the rupee.
“We estimate systemic liquidity deficit at around Rs 1.9 lakh crore by March 2019 with core liquidity deficit at around Rs 63,700 crore after additional OMO purchases of Rs 1.2 lakh crore in the rest of FY19," the Kotak report said, adding that liquidity is strained only in pockets and is not a system-wide crisis.
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