Monetary policy review: RBI rate cutting 'cycle' to continue, says expert

The MPC is likely to be set to deliver one more repo rate cut later this week, which would then be the second cut in a row, given the continued downside surprises in CPI, broadly anchored commodity prices, subdued domestic growth indicators of late, and a benign global monetary policy backdrop. 

Since expectations are already heavily biased toward a rate cut in April, the future guidance and voting pattern of the MPC will be watched closely. It seems that the evolving balance of risks to inflation and growth trajectories may prompt the committee to provide a dovish guidance on the rates front, even if it might maintain a “neutral” policy stance. Separately, the RBI’s step up in liquidity infusion in recent months also remains noteworthy.

Inflation drivers stay weak

Retail inflation remains markedly soft and the key trigger for the RBI’s dovish stance. The two monthly CPI prints released after the February MPC meeting stayed further lower than the RBI’s forecasts; the February print marked the seventh consecutive month of sub-4% CPI inflation. Food inflation is low, with cushion from both perishable and non-perishable segments. 

Even the spikes in certain core inflation components (eg., health, education) seen during late-2018, seem to be dissipating. Taking into account all such trends, it seems now that CPI inflation might average a benign 3.5% in 2019 and 4.4% in 2020.

Cumulatively 75 basis points rate cut during 2019  

That should, in my view, pave the way for a 25 basis points repo rate cut in this week’s MPC meeting, even if one takes into account uncertainties around the winter (Rabi) crop and uptick in risks of an El Nino in 2019. 

India’s higher level of real interest rates also gives the central bank more room for further accommodation in the coming months, provided the external backdrop – eg, commodity prices and the policy bias of developed market central banks – remains favourable. Beyond April, I see the likelihood of the RBI delivering another 25bp repo rate cut in the subsequent quarter, taking the repo rate to 5.75% by Q3 2019.

A more flexible interpretation of the RBI’s inflation targeting mandate

The February MPC meeting made a distinctly dovish switch in the monetary policy stance, bringing it back to “neutral” from “calibrated tightening” adopted as recently as in Q4 2018. 

During the post-policy communication, RBI leadership emphasised growth, stressing on the slowdown in high-frequency activity indicators of late, and made repeated references to the preamble of the RBI Act, which states that the central bank should maintain price stability “while keeping in mind the objective of growth”.  

Given this, it seems that the MPC, under governor Das, may interpret its inflation-targeting mandate differently than seen recently and might therefore make greater use of the +/- 2% range around the midpoint of the RBI’s legislated CPI inflation target of 4%.

The author is Chief Economist, India, Barclays. Views expressed are that of the author