Will the monetary policy committee (MPC) deliver a rate cut today? Chances for that happening are quite less. The simple reason is that nothing much has fundamentally changed to warrant a rate cut now seen against the period of last monetary policy. The retail inflation continues to inch up leaving no clues for the policymakers with respect to its future course. In December, when the latest CPI print came out, the figure stood at 5.21 percent compared with 4.88 percent in the month ahead.
The December print as recorded at a 17-month high. This is well above RBI’s inflation forecast of 4.3 percent -4.7 per cent. The MPC is likely to take a wait and watch mode for now before tinkering with rates. Secondly, the MPC may not be too comfortable with respect to the fiscal situation at this juncture. The government has 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. The 60bps pick-up in GDP growth in the second quarter to 6.7 percent has revived hopes of a recovery. There are certain early signals for a recovery that add to the confidence of the growth-lobby.
In the December policy, the RBI had left enough hints that it is comfortable with the growth picture saying in MPC’s assessment, there have been several significant developments in the recent period which augur well for growth prospects, going forward. It listed three main points: First, “capital raised from the primary capital market has increased significantly after several years of sluggish activity. As the capital raised is deployed to set up new projects, it will add to demand in the short run and boost the growth potential of the economy over the medium-term.”
Second, “the improvement in the ease of doing business ranking should help sustain foreign direct investment in the economy.”
Third, “large distressed borrowers are being referenced to the insolvency and bankruptcy code (IBC) and public sector banks are being recapitalised, which should enhance allocative efficiency.
In this backdrop, the MPC may not be too perturbed with the growth scenario. Even it offers a token rate cut of quarter percentage point, it will be hardy make any difference to the borrowing costs of small companies. Instead, it could ask banks to further pass on benefit of earlier rate cuts to the end consumer.
The stock market, which has been on a crash course of late, has already factored in a status-quo in rates. If a rate cut happens, that would certainly enthuse markets but that is unlikely to happen today. It’s not the rate cut but the policy language that one should watch out for from today’s policy, particularly given that this is the first monetary policy post budget. MPC’s comments on inflation expectations and growth will be crucial. Also, critical is to watch is how monetary policymakers are looking at the chances of a fiscal slippage as indicated in the Union budget.
Updated Date: Feb 07, 2018 11:19 AM