MPC reassures status quo on rates, but changes view on inflation

The temporary supply shocks that have led to higher inflation has been kept aside by the MPC while focusing on growth

The credit policy announced on Friday was not expected to come out with anything very different from the earlier announcements. There are no changes in policy rates as expected with the Reserve Bank of India (RBI) reiterating commitment to growth, which is still in early stages. But yet there are some things that the market always looks forward to in terms of numbers and language. Both are important. Any change in forecasts would make economists rework their models to see if they need to change their assumptions. The language is important, as it could talk more about what to expect from Mint Street in the future.

The RBI has left the GDP forecast unchanged at 9.5 per cent and the quarterly progression would follow the earlier path. There have been minor changes here at 21.4 per cent for Q1, 7.3 per cent in Q2, 6.3 per cent in Q3 and 6.1 per cent in Q4. Therefore, we can expect a diminishing growth rate during the four quarters, which is more based on the base effects weaning rather than absolute growth slowing down. In fact, absolute growth will be picking up. The RBI is confident that there has been revival in all the three engines: consumption, investment and external demand. Here it can be argued that it still needs to be seen if this has worked out, because base effects have tended to make several initial indicators look good.

On inflation, the RBI has become slightly more hawkish as the overall forecast has changed from 5.1 per cent to 5.7 per cent with the predictions being 5.9 per cent, 5.3 per cent and 5.8 per cent respectively in the last three quarters. This is interesting because there is acceptance that inflation will be elevated throughout the year, notwithstanding the fact that there will be a good kharif harvest. We are definitely talking of numbers in the region of 4 per cent and the range is between 5-6 per cent. The problem evidently will be on non-food products, including oil-related goods.  

Here one can say that the RBI has taken a dualistic view. The first is that while growth is picking up, it remains fluid given the possibility of the third wave. Therefore, the RBI will continue to focus on growth. The second is that inflation is seen as being transient even today, and this is the important part of the commentary. The temporary supply shocks that have led to higher inflation have been kept aside by the MPC while focusing on growth.

The RBI is happy with the status of liquidity and the transmission of interest rates by banks, which has helped lower the cost for most borrowers. So far, it has been seen that while interest rates have come down, the willingness to lend has been a problem as banks have been careful on this score. In fact, of late even retail loans are facing challenges given that the non-performing asset (NPA) levels have gone up of late.

The language this time has been more predictable. It may be recollected that in the earlier policy, the Governor did talk quite definitely on the objective of managing the yield curve. This was significant because it gave a clear indication that the RBI would ensure that bond yields remained stable. But the market had other views and we have seen the yields rise very gradually with the ten-year bond now touching 6.20 per cent.

Therefore, overall the RBI has not quite changed any view on ideology. The 10-years bond went up from 6.20 per cent to 6.23 per cent as the Governor concluded his speech. Maybe the market still is not too convinced given the high inflation and government borrowing programme.

 

Madan Sabnavis is chief economist at CARE Ratings. Views expressed are his own.