 "Siddhartha Sanyal")
The Reserve Bank of India (RBI)'s keeping the policy rates unchanged in the June meeting is no surprise. Given that the April meeting easing was, in effect, significantly larger than a 25-basis point (bp) repo rate cut as well as recent upside surprise in inflation prints, there was no expectation of a rate cut in the current meeting. Also, having already delivered 150 bp of repo rate cuts since January 2015, RBI will likely utilise its remaining 'rate cut bullets' cautiously. Nevertheless, RBI was explicit that the stance of monetary policy continues to be accommodative and it will remain watchful for further scope of policy action. I expect another 25-bp cut during 2016; the precise timing will depend on a host of factors including the unfolding inflation trajectory, commodity prices, global developments and potentially even the decision on the reappointment of the RBI governor.
Apart from underscoring an accommodative policy stance, RBI also clearly reaffirmed its continued commitment to cater to the banking system's liquidity needs. This commitment to support liquidity is extremely important and a welcome move. RBI has already infused Rs 70,000 crore into the banking system through open market operations in the past two months, more than what was done during each of the past three financial years. I certainly expect them to continue infusing significant quantum of 'durable' liquidity in the coming months as well. To put this in context, RBI has absorbed nearly 100 per cent of the net supply of Indian Government Bonds (IGBs) in 2016 and purchased 18 times more than financial institutional investors during the year. Indeed, the April meeting was clearly a key inflection point in RBI's monetary policy stance, when they guided for lowering of structural liquidity deficit. It is, thus, important for the market now to focus more on RBI's liquidity supporting actions rather than narrowly focusing on the repo rate.
India's macro parameters remain conducive of an accommodative monetary policy stance. Inflation stays benign - I expect Consumer Price Index (CPI)-based inflation to average 4.8 per cent or modestly higher in 2016-17, Wholesale Price Index (WPI)-based inflation year-on-year is barely positive, and demand-driven pressure on inflation remains modest. Admittedly, the rupee trajectory and commodity prices are risks. But, on balance, they will likely not alter the otherwise subdued inflation trajectory materially. Recovery in growth remains modest, with a markedly subdued private capex cycle. Thus, the seemingly high headline gross domestic product growth should also not be seen as any obstacle for a continued accommodative monetary policy stance.
Siddhartha Sanyal
Director & Chief Economist-India, Barclays Bank
Director & Chief Economist-India, Barclays Bank
