Das stresses central bank’s inflation-targeting function, lobs growth ball into government’s court
Reserve Bank of India (RBI) on Thursday slashed its GDP growth forecast for 2019-20 to just 5% but left the repo rate unchanged at 5.15%, hinting the government should do the heavy lifting. RBI governor Shaktikanta Das stressed the central bank’s inflation-targeting function, lobbing the growth ball into the government’s court. The pause, although accompanied by an accommodative stance, sent bond yields up to a two-month high of 6.13% with markets fearing government borrowings in 2020-21 could shoot up.
Most economists had predicted a 25 basis points (bps) cut since inflation, while on its way up, isn’t expected to run away. Moreover, they expected the central bank to look through what they believed would be a transitory spike, especially in food prices, given growth is crawling.
“RBI sees through growth instead of seeing through inflation,” Sonal Varma, chief economist at Nomura, wrote. The RBI raised its retail inflation forecast to 4.7-5.1% from 3.5-3.7% for H2FY20 and saw it at 3.8-4% for H1FY21, with risks broadly balanced.
However, there’s near consensus rate cuts will be back on the table, next year. “We believe that higher inflation and potential fiscal slippage in the Union Budget (on February1) will lead the MPC to extend its pause to the next February meeting (on February 6). Thereon, we believe the sub-par recovery amid ebbing inflationary pressures should provide space for a 25 bps rate cut in Q2,” Varma wrote.
Governor Das acknowledged transmission remains delayed; against the cumulative reduction in the policy repo rate by 135 bps during February-October 2019, the weighted average lending rate on fresh rupee loans sanctioned by banks declined by 44 bps.
The RBI expects transmission to improve as the share of loans linked to the base rate falls and MCLR-based floating rate loans, which typically have annual resets, become due for renewal. An expected spike in food inflation in Q4FY20 forced the MPC’s hand, Das said, adding that the recent series of tariff hikes by telecom service providers could also play into the core inflation print. CPI inflation hit a 16-month high of 4.62% in October and the retail price of onions has become the subject of parliamentary debates of late.
In an effective acknowledgement of the fact that growth has been flagging even as the repo underwent five rounds of cuts and inflation spiked, the RBI governor said the past series of cuts need more time to play out. Das said the monetary policy committee (MPC) is keeping its powder dry for a day when rate cuts will be most effective. For now, it will wait for the impact of past rate cuts and growth-boosting government measures to play out fully.
“The forward guidance in itself indicates that there is room available for further monetary policy action,” Das said in a post-policy press briefing. Siddhartha Sanyal, chief economist, Bandhan Bank, said, “We expect CPI to soften in the next two-three months, reopening space for further monetary easing during H12020. The December MPC decision should be seen as a pause and not the end of the easing cycle.”