RBI keeps repo rate unchanged: MPC has a word of caution for Modi govt and bad news for investors

There is nothing surprising about the status-quo in the policy rates but read between the lines, there is a word of caution for the government and bit of bad news for investor-lobby. The clue lies in the inflation projections given for rest of this fiscal year and for the next fiscal year. The central bank has upped the inflation forecast for Q4 of this fiscal year to 5.1 percent from 4.3 percent to 4.7 percent earlier and to 5.1-5.6 percent in the first half of next year. It expects inflation to come down in the second half of next year but subjected to certain conditions. Till the end of first half of next year, the inflation threat is real, which in turn means no one should hope for a rate cut in that interval. At the presser that followed the announcement, there was ample caution from Reserve Bank of India (RBI) governor Urjit Patel with respect to the upside risks to inflation including the likely impact of fiscal slippage on the course of monetary policy. The key reasons mentioned for an uncertain inflation outlook include the staggered impact of HRA increases by various state governments that may push up headline inflation further over the baseline in 2018-19, pick-up in global growth that may exert further pressure on crude oil and commodity prices with implications for domestic inflation, impact of the revised minimum support prices (MSPs) for kharif crops, impact of increase in customs duty, fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook and, finally, the impact of fiscal developments and normalisation of monetary policy by major advanced economies. “There is, therefore, need for vigilance around the evolving inflation scenario in the coming months,” the MPC has said. Of these reasons cited, the one with direct bearing on the government is the fiscal slippage and its impact on monetary policy ahead. [caption id=“attachment_4247669” align=“alignleft” width=“380”]  File image of RBI governor Urjit Patel. AFP pic[/caption] Here, there is a direct message to the Narendra Modi government that unless the fiscal situation improves, scope for further rate cuts will not happen. “Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise,” the RBI has said. Remember, in the just announced Budget, the government had estimated a higher-than-expected deficit figure of 3.5 percent for the current fiscal year against the 3.2 percent projected earlier. Time and again, the central bank has reminded the government about the need to stick to the path of fiscal prudence. Third, the growth scenario is not looking as bad as it appeared in the first quarter of this fiscal year to warrant an urgent rate cut boost. Not just on the inflation front, for while the MPC has acknowledged the early signs of revival in the economy, the GVA forecast for FY18 has been revised down to 6.6 percent from 6.7 percent earlier. Even the nascent recovery in growth needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management, the central bank has warned. In short, the MPC has taken a cautionary stance. Here again, the ball is back in the government’s court. The message is clear: The government will have to get its act together to manage finances, and then ask for a rate cut. To sum up, with the high risk factors remaining, chances for a rate cut any time in the foreseeable future is unlikely. This is a strong word of caution to the government and bad news for rate cut hungry investor-community.