RBI to opt for a prolonged pause in rate moves: Barclays' Siddhartha Sanyal

The RBI seems justifiably set for a status quo as regards the repo rate in the MPC meeting next week. The central bank delivered a surprise pause in its October policy meet, even as the MPC chose to change the monetary policy stance to "calibrated tightening", ruling out any possibility of rate cuts in the near term. Subsequently, although core inflation (CPI excluding food and fuel) remains elevated, headline CPI inflation - the legislated key target variable for the MPC as per its inflation targeting mandate - hit a thirteen month low in October, surprising to the downside for the fourth straight month.

The sharp c.30% fall in oil prices since the October MPC meeting and a stronger rupee have materially lowered the upside risks to inflation. Moreover, food prices continue to surprise to the downside despite the sizeable upward revisions in minimum support prices (MSPs) of summer crops in recent months. We now expect inflation in Q4 18 (October-December) to average c.3.0% y/y, a chunky 90bp lower than the MPC's October forecast of 3.9%. Such a strong and persistent downside surprise in the inflation trajectory should pre-empt possibilities of a hike in December.

 

Siddhartha Sanyal, Chief Economist - India Barclays Bank PLC

Moreover, barring any unforeseen supply shocks, lower food and fuel costs should also impact the RBI's inflation forecasts for most of 2019. For instance, we expect CPI to average 3.9% and 4.5% respectively during the first two quarters of 2019, again hefty 30-60 basis points lower than the MPC's current projections for those quarters. Accordingly, we also now expect the RBI to opt for a prolonged pause in rate moves, with the next repo rate hike (+25bp) unlikely before the MPC's June 2019 meeting. 

In this context, we note that India's real interest rates (more than 300 basis points, ex post) are higher than several of its emerging market peers. Ex-ante, our forecasts indicate a real interest rate of close to 200 basis points, even after accounting for an uptick in inflation in 2019, which should provide a sufficient cushion for the MPC to go into a 'wait and watch' mode in the coming months.

Benefits of softer oil prices remain multi-pronged to offer the RBI some comfort. The oil sensitivity of India's current account remains high at c.$12bn for every $10/barrel change in prices. This implies that if the current price of oil (c.$60/bbl) is sustained for a year, India's current account deficit during 2019 would be close to 2.0% of GDP compared with our existing forecast of c.2.5%. However, in this context, we would like to flag that it will be a significant policy mistake to overlook the more pressing structural issue of a steady widening in India's non-oil, non-gold trade deficit, which has nearly doubled since 2013, and will likely keep the current account deficit relatively large in coming quarters, despite the benefit of lower oil prices.

---

Views expressed are personal