Monetary policy review: RBI set to cut rate. Question is by how much?

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das.

Business Standard : The Reserve Bank of India is set to deliver a fifth straight interest rate cut Friday, although economists are unsure of the quantum following an unconventional 35 basis-point easing last time.

While all 39 economists surveyed by Bloomberg News expect a reduction, their forecasts range from 15 basis points to 40 basis points. The RBI has lowered borrowing costs to a nine-year low of 5.4% through 110 basis points of easing so far in 2019.

The meeting of the six-member Monetary Policy Committee led by Governor Shaktikanta Das comes amid growing concerns about India’s banking and financial sector, and just weeks after Prime Minister Narendra Modi eased fiscal levers by announcing a surprise $20 billion tax break for companies.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das.

Here’s a look at what else to watch out for:

Growth

The RBI has lowered its growth forecast for the current fiscal year three times already, with the latest revision in August pegging growth at 6.9%. Data since has shown gross domestic product expansion slowing to 5% in the June quarter, the weakest pace in six years. That may prompt the central bank to revisit the numbers once again.

The latest growth numbers “look much worse,” Das said recently, referring to RBI’s projection of 5.8% expansion in the April-June period. “There is a slowdown, which was evident and at the last MPC we very clearly said that growth seems to be losing traction and therefore, growth is a matter of highest priority.”

Inflation

A recent spike in onion prices notwithstanding, headline inflation has stayed below the RBI’s 4% medium-term target for 13 straight months.

Food and beverage prices, which account for about half of the consumer price basket, have climbed on the back of a surge in urban food inflation. Das has said gains in food inflation are cyclical and there won’t be much pressure on prices, given monsoon rains appear to be normal.

Core inflation, which strips out volatile food and fuel prices, has been decelerating amid subdued demand. That will give the central bank ample space to keep policy accommodative in the coming months.

RBI policy boost in low-inflation phase: Here's what data says

The MPC expects low levels of inflation to continue for a long period.

In line with market expectations, the monetary policy committee (MPC) decided to reduce the benchmark repo rate by 25 basis points last week, to 6 per cent .

The nudge came from low levels of consumer price index (CPI) inflation, which remained below expectations. Though the core CPI inflation rate dropped but remained high at 5.3 per cent in February, headline CPI inflation remained low—rising a bit—to.

The MPC expects low levels of inflation to continue for a long period. It revised projections downward to 2.9-3.0 per cent in H1 FY20 and 3.5-3.8 per cent in H2 FY20.

Expected growth in FY20 was subsequently revised downward from the initial expectation of 7.4 per cent to 7.2 per cent. Many high frequency indicators “suggest significant moderation in activity”, the MPC noted.

It is evident in the sustained contraction in auto production.

Households too are expecting inflation to subside, with the three-month-ahead and the one-year-ahead expectations declining by 40 basis points

Oil showed a different picture, with the MPC underlining the rise in global crude oil prices, which rose 10 per cent since the last policy announcement in February.

Yet, some macro indicators remained in the positive, with the investment rate rising to 33.1 per cent of GDP in Q3 FY19 from 31.8 per cent of GDP in Q3 FY18.

This was supported by “the government’s thrust on the road sector and affordable housing,” the MPC said. Capacity utilisation in industry rose to its highest in the last six years.

Business Standard