Monetary policy panel may soften tone on rate, say economists

Economists expect the Reserve Bank of India’s monetary policy committee (MPC) to change its stance to “accommodative” in the next meeting, given that growth fell sharply to 6.1 per cent in the fourth quarter of FY17, when re-monetisation was believed to have gathered steam.

A rate cut is ruled out, owing to the excess liquidity sloshing around in the system. As such, say experts, it may not have the desired impact.

“I expect the MPC to change its stance to accommodative in the next meeting (on June 7),” says Soumya Kanti Ghosh, group chief economic advisor, State Bank of India. 

Others concur.

“Gross domestic product (GDP) and gross value added (GVA) growth in Q4 FY17 have surprised on the downside,” says Aditi Nayar, principal economist at ICRA. “Nevertheless, we continue to expect the MPC to keep the repo rate unchanged in the June 2017 policy review, amid a perceptible softening of the tone of the policy statement.”

Arguments for a more accommodative monetary policy stance rest on the fact that investment growth continues to be sluggish and the threat of inflation surprising on the upside seems to be receding.

The new GDP estimates showed gross fixed capital formation, which signifies investment, contracting 2.1 per cent in the fourth quarter. Investments have been slowing since the beginning of the year — from 7.4 per cent in the first quarter of FY17 to 1.7 per cent in the third quarter. 

“There is a low probability of a revival in the investment cycle till the first half of the next financial year,” says Devendra Pant, chief economist, India Ratings and Research.

In a research note, Ghosh points out the contradiction between the various sets of data and the dilemma before the MPC now. “Interestingly, RBI in its monetary policy report (Apr 2017) indicated that activity in the industrial sector gained momentum in H2FY17, buoyed mainly by better performance of the mining and quarrying sectors.”

But while “mining growth did improve, overall IIP growth (new series) in H2 was merely 3.6 per cent, against 6.5 per cent growth in H1. Manufacturing growth slumped to 2.9 per cent in H2, compared to 7.1 per cent in H1. Electricity also decelerated marginally to 5.2 per cent in H2, from 6.6 per cent in H1,” he adds. 

On the inflation front, the upside risks seem limited. Retail inflation had fallen sharply to 2.99 per cent in April, with food inflation at 0.61 per cent.