Dec 05, 2017 06:48 PM IST | Source:

RBI may pause on rates, but can it overlook quality of growth?

It is widely expected that a combination of rising prices and slightly better growth will hold the RBI back from cutting rates tomorrow.

Since RBI’s last credit policy on October 4, the yield on the 10-year benchmark has moved in only one direction – up. It is widely expected that a combination of rising prices and slightly better growth will hold the RBI back from cutting rates tomorrow. But has growth made a decisive comeback? Is the RBI comfortable with the tight liquidity? Will it sound hawkish or dovish? These are the questions that that the market is seeking answers for in tomorrow’s policy.


Inflation – on an upward trajectory

As the central bank had correctly predicted, inflation both at the wholesale and at the retail level has been rising.

Policy 2

The consumer price inflation (CPI) hit a seven-month high in October as vegetable prices surged. Food inflation increased to 1.9 percent from 1.3 percent in September 2017. Core inflation remained unchanged over the preceding month at 4.6 percent.

Wholesale inflation (WPI) at 3.6 percent was up 100 basis points. Food inflation inched up to 3.23 percent in October, from 1.99 percent in September.

Other than sugarcane, overall production of kharif output is expected to be lower this year as per initial estimates from the Ministry of Agriculture. The total area under rabi sowing, however, has reportedly increased, and that can ease pressure on prices marginally in the second half of the fiscal.

Global growth, nevertheless, remains on a firm footing. The IMF has upped its global growth forecast to 3.6 percent in 2017 and 3.7 percent in 2018, both 0.1 percent higher than projections in July. This is reflecting in strong commodity prices that adds to the inflationary pressure for India.

policy 3

Is growth making a decisive comeback?

Against the backdrop of rising prices, the RBI could draw comfort from the semblance of a revival in manufacturing.

Graph 4

The demonetisation-led base effect will make the growth numbers in the second half of FY18 look better. Worryingly, the level of investment activity continues to remain sub-optimal as seen from the falling investment to GDP ratio. Whether RBI sheds light on the same or the impending bank recapitalisation that could have a far reaching impact on investment activity remains to be seen.


In the previous policy, the RBI had warned the government against fiscal profligacy and the recent Moody’s rating upgrade has virtually closed the door for the same. It would look odd to pat yourself on the back for bold economic reforms and then stray from the path of fiscal discipline.


Although the government has already front-loaded the expenditure this year (in the absence of the private capex), the headroom to accelerate further is limited. Already, fiscal deficit has touched 96 percent of the full-year target. With both banks and corporates still in the process of cleaning up their balance sheets, private capex will be muted. These are some of the challenges to growth.

Since the last Monetary Policy Committee Meeting, the liquidity in the banking system has tightened on a combination of factors ranging from a rise in currency in demand to outflow of tax – RBI might like to comment on the same.


However, what will be of interest to the market will be the RBI’s tone on rates.

For more research articles, visit our Moneycontrol Research Page.

tags #Economy

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