The RBI monetary policy committee will announce its policy decision today. With the market divided over the quantum of a repo rate cut.
Highlights:
- RBI monetary policy committee is expected to announce the fifth consecutive rate cut to support the government’s measures.
- The market is expecting RBI not to tweak its consumer price inflation forecast.
Five steps Of RBI Monetary Policy Are:
1- What could be RBI’s likely rate action
The MPC is expected to announce the fifth consecutive rate cut to support the government’s measures, such as reducing corporate tax, to boost economic activity amid benign inflation. Six out of 10 treasury heads and economists surveyed by Mint said that RBI repo rate will be reduced by 25 basis points to 5.15% while maintaining an accommodative stance. While some expect a 40 bps cut, a minority expect a 15 bps cut, followed by a 25 bps cut in the December policy. However, all experts unanimously believe that the central bank is nearing the terminal repo rate of 5% by the end of the calendar year, which will be followed by a pause for some time.
2- Will RBI change its outlook on growth
The MPC had projected India’s gross domestic product (GDP) at 6.9% for the fiscal year 2019-20. With the growth number slipping to 5% in the first quarter, the weakest in more than six years, experts believe that RBI could be prompted to further reduce its full-year growth forecast. For the past few months, RBI has been shaving off its growth projections at each successive policy meeting. In effect, RBI has reduced its GDP growth estimate for 2019-20 by 50 bps in a span of five months. The majority of economists and bankers polled expect RBI to revise its growth forecast for FY20 to 6.5% in the Friday meeting.
3- Will RBI change its outlook on inflation
Market is expecting RBI not to tweak its consumer price inflation forecast which has been pegged at 3.5-3.7% for the second half of the fiscal year 2019-2020. In the previous policy, RBI had said that it will watch out for factors such as monsoon impact on food prices and crude oil prices amid geopolitical tension in the Middle East. While the threat to headline inflation persists, economists believe that the RBI is not in a tough spot in the near term at least. The comfort is food inflation may have inched up slightly in August, but core inflation (excluding food and fuel) continued to move lower.
4- What will be RBI’s views on the fiscal deficit
Just a day after Governor Shaktikanta Das said that the government has limited fiscal space to support growth, Finance Minister Nirmala Seetharaman announced a massive corporate tax rate cut to give a fillip to the ailing economy. RBI cannot ignore fiscal slippage due to revenue foregone and the recent drop in GST collections. Fiscal slippage is likely to reduce the impact of an interest rate cut on market rates as it may not react. Analysts have indicated that the fiscal deficit of the government would widen to 3.5-3.8% of gross domestic product from the budgeted 3.3%, owing to the revenue shortfall.
5- What will be RBI’s view on the health of the banking system
Over the past few weeks, the banking system has been struck with a barrage of negative news. The fiasco at the Punjab and Maharashtra Bank following RBI’s restrictions threatened to snowball into a larger crisis of confidence in the banking system. This forced the central bank to issue several statements ascertaining that the banking system is safe and stable in order to assuage the fears of all depositors. Simultaneously, shares of private sector banks got pummeled after concerns were raised over their exposure to troubled real estate companies. RBI watchers will also look for any comments on the ailing non-banking finance companies and measures to improve their liquidity position.
