The Reserve Bank of India’s (RBI’s) new monetary policy regime has got off to a dovish start by trimming policy rates by 25bps in its first meeting. The decision was likely a close call as RBI’s forecasts for CPI inflation both end-FY2017 and end-FY2018 show inflation risks skewed to the upside despite the impact of the 7th Pay Commission not being factored in. As we suspected, greater confidence that this year’s monsoon is good enough and will continue to pull down food inflation in the months ahead was key to the decision.
Following today, the temptation will be to jump to the conclusion that the new governor will be decisively more dovish than his predecessor. That would be premature. What is clear is that – hawk or dove – space for further cuts is limited even given a flexible approach to the 4% inflation target. RBI’s new monetary policy framework delivers a modest surprise with the freshly constituted six-member Monetary Policy Committee (MPC) voting to trim the key policy rate — the repo rate — by 25bp to 6.25%. The market consensus was relatively split with the Bloomberg survey reporting 17 out 39 economists (including ourselves) expected a rate cut today. Importantly, the decision was unanimous with all six MPC members reportedly in favour of the cut.
The temptation is to see today’s decision as a clean break with the Rajan era but inevitably there is a strong element of continuity, not least as governor Patel was of course Rajan’s deputy and instrumental in the design of the new monetary policy framework. The last policy review left the central bank with a clear bias for lower rates should space open up. Greater confidence that this year’s monsoon is good enough to spur a rural revival and pull down food inflation and the evidence from the August CPI report that this is already happening were enough to trigger a modest easing this time around.
The author is chief economist for emerging markets at BNP Paribas