RBI monetary policy: Strong support to our 'MPC on hold' view, says expert

Barclays Chief India Economist Siddhartha Sanyal expect MPC to remain mindful of not stifling growth at current nascent stage of recovery

The Reserve Bank of India’s (RBI’s) decision to maintain the status quo on rates in the April MPC meeting is no surprise. Continuing with the neutral monetary policy stance was also widely expected. However, the lowering of its inflation forecast trajectory by the central bank and the tone of the MPC statement, which is dovish in our opinion, came in as a strong support for our view of the status quo on the repo rate during 2018.

Indeed, the revision in the RBI’s inflation forecast is notable, especially given that the previous set of forecasts was published just two months back. The central bank’s projected inflation trajectory is now closer to our forecasts, but is still higher. The RBI now expects CPI inflation to be in the range of 4.7-5.1 per cent during H1 2018-19 (previously: 5.1-5.6 per cent) and to ease further to average 4.4 per cent during H2 (previously: 4.5-4.6 per cent). The RBI flagged several risks to its baseline inflation outlook, including the impact of the hike in MSPs for agricultural products, rise in house rent allowance (HRA) for state government employees, fiscal slippage at central and state level, risks around monsoon rainfall, and recent volatility in crude oil prices. While none of these risks can be ignored, our baseline scenario continues to be that of CPI inflation averaging a mere 4.2 per cent during H2 2018-19.

Source: RBI, Barclays Research

Given that the MPC action will likely remain data-dependent and our expectation of CPI inflation averaging a benign 4.6 per cent during 2018-19 and a particularly soft 4.2 per cent during H2 of 2018-19, we feel the case for a long phase of status quo on the policy rates remains compelling. Admittedly, CPI will likely rise during the April-June quarter, peaking at around 5.5 per cent y-o-y. However, the transient uptick in inflation would primarily be a reflection of statistical factors rather than of genuine inflationary pressures. 

While the MPC will likely stay alert to further upside risks to the inflation trajectory, we expect it to remain mindful as well of not stifling growth at the current nascent stage of recovery. While growth momentum appears to have strengthened, the uptick in GDP prints needs careful interpretation. We feel persistent low capacity utilisation (71-74 per cent), weak private capex and a low base (sub-7 per cent GDP growth during recent years) should pre-empt overheating concerns. Against that backdrop, we see the April MPC statement as another strong reinforcement to our “MPC on hold” view.