The Monetary Policy Committee (MPC)'s decision to cut rates by 25 basis points (bps) was largely on expected lines. On the growth front, although the Reserve Bank of India (RBI) kept its real Gross Value Added (GVA) growth estimate unchanged at 7.6 per cent, its charts reveal that Consumer Price Index (CPI)-based inflation, in March 2017, would be around five per cent (vis à vis 5.4 per cent earlier).
The surprising element is that the inflation trajectory projection clearly has an upside bias. Inflation is likely to decline significantly over the next few months and there is a sub-four per cent possibility, at least a couple of times from November. One possible reason for an inflation forecast higher than market expectations is to fathom any unwarranted increase in inflation expectations.
In the past, there have been instances where RBI’s inflation forecast was higher by 300 bps than the actual one. In the post-policy interaction, RBI clarified the real rate of interest may be now at 1.25 per cent. We believe this is entirely consistent with RBI’s assessment and the market should not read too much into it.
The good thing: Based on such real interest rates, there is scope for continued monetary accommodation. The RBI governor also clarified that liquidity will continue to be adequate. This is likely to aid transmission, which under the new marginal cost of funds-based lending rate (MCLR) dispensation, is now progressing in baby steps every month.
On the newly-constituted MPC, there is no clear evidence whether an individualistic or collegial format works better. It is certainly plausible that members of a MPC might have different forecasts due to different techniques. We believe this will take time to evolve and hence, a certain degree of cautiousness on the part of MPC in cutting rates by only 25 basis points. Overall, a good beginning for MPC.
Soumya Kanti Ghosh
Chief Economic Advisor, State Bank of India
The surprising element is that the inflation trajectory projection clearly has an upside bias. Inflation is likely to decline significantly over the next few months and there is a sub-four per cent possibility, at least a couple of times from November. One possible reason for an inflation forecast higher than market expectations is to fathom any unwarranted increase in inflation expectations.
In the past, there have been instances where RBI’s inflation forecast was higher by 300 bps than the actual one. In the post-policy interaction, RBI clarified the real rate of interest may be now at 1.25 per cent. We believe this is entirely consistent with RBI’s assessment and the market should not read too much into it.
The good thing: Based on such real interest rates, there is scope for continued monetary accommodation. The RBI governor also clarified that liquidity will continue to be adequate. This is likely to aid transmission, which under the new marginal cost of funds-based lending rate (MCLR) dispensation, is now progressing in baby steps every month.
On the newly-constituted MPC, there is no clear evidence whether an individualistic or collegial format works better. It is certainly plausible that members of a MPC might have different forecasts due to different techniques. We believe this will take time to evolve and hence, a certain degree of cautiousness on the part of MPC in cutting rates by only 25 basis points. Overall, a good beginning for MPC.
Soumya Kanti Ghosh
Chief Economic Advisor, State Bank of India
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