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Is this the end of monetary easing cycle?
Even weaker growth is unlikely to nudge cautious RBI
4 October 2017
The Economy Observer
In line with market consensus, the Monetary Policy Committee (MPC) decided to keep the policy rates on hold today.
The decision was taken with a majority of 5-1 votes.
Interestingly, while the MPC kept its inflation projection for FY18 broadly unchanged (revised slightly from 4-4.5% to
4.2-4.6% for 2HFY18), the GVA growth forecast was cut from 7.3% to 6.7%.
We believe that while inflation is likely to remain in line with the RBI’s forecasts, there is still a downside risk to its
revised GVA growth forecasts. Consequently, although there is a window to cut interest rates, we are highly doubtful if
even slower growth would nudge the cautious RBI. Accordingly, the monetary easing cycle may have ended in India, in
our view.
MPC maintains status quo:
In its fourth Bi-monthly Monetary Policy held today,
the Monetary Policy Committee (MPC) kept its policy rates unchanged – the
repo rate at 6%, the reverse repo rate at 5.75% and the marginal standing
facility (MSF) rate at 6.25%.
(Exhibit 1).
The decision to keep rates on hold was in
line with market expectations. We, however, had
argued
that there was
sufficient room for the RBI to cut rates in its today’s meeting, considering the
sharp weakness in economic activity. The decision to hold rates was taken with a
majority of 5-1 votes, with Dr Ravindra Dholakia voting for a cut of at least 25bp.
Inflation projection was broadly maintained for FY18…:
In terms of the
economic outlook, the MPC largely maintained its inflation forecast range for
2HFY18 – as against 4-4.5% projected earlier, it was revised up marginally to
4.2-4.6%. Like in the previous policy, it highlighted upside risks to inflation,
primarily due to (1) fiscal slippages owing to the implementation of farm loan
waivers by the states and (2) the implementation of salary & allowances by the
states (this could push up inflation by ~100bp). For 2018-19, the RBI expects
inflation to average to about 4.7%, but soften to ~4.5% by 4QFY19. Overall, it
seems that the RBI should not be too worried about inflation.
…while growth forecast was revised downward:
On the other hand, the RBI cut
the GVA growth projections for FY18 sharply – from 7.3% projected earlier to
6.7%. On a quarterly basis, it expects real GVA to grow 6.4% in 2QFY18, but pick
up to 7.7% by 4QFY18. Although it acknowledged the possibility of widening of
the output gap, it needs more data to determine whether the current slowdown
is transient or not. Assuming normal monsoon, fiscal consolidation and no major
exogenous/policy shocks, it estimates real GVA to grow 7.4% in FY19.
Is this the end of monetary easing cycle?
We believe that there are still
downside risks to the RBI’s revised GVA growth forecasts for FY18 and FY19,
even though FY18 inflation is likely to remain in line with the RBI’s projections.
Accordingly, although there is a window to cut interest rates, we are highly
doubtful if even slower growth would nudge the cautious RBI. Accordingly, the
monetary easing cycle may have ended in India.
Nikhil Gupta
– Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Rahul Agrawal
– Research analyst
(Rahul.Agrawal@motilaloswal.com); +91 22 3982 5445
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