RBI governor Urjit Patel had said that the central bank's mandate was only inflation targeting and that change in stance to calibrated tightening meant that rate cut was off the table. What will happen in December?
In October, when crude oil prices were surging and the rupee was falling, the market had anticipated a rate hike by the Reserve Bank of India (RBI). However, the central bank surprised the market by keeping the maintaining status quo on key repo rate, while changing the stance from ‘neutral’ to ‘calibrated tightening’.
Explaining the rationale behind the unanticipated move, RBI governor Urjit Patel had said that the central bank’s mandate was only inflation targeting and that change in stance to calibrated tightening meant that rate cut was off the table.
The inflation remained overwhelmingly lower than the RBI’s target of 4% in the month of October. Retail inflation or the CPI inflation, which the central bank targets, was just 3.31% in October at 13-month-low.
Given the circumstances, rate cut being off the table and inflation easing, the only option is another status quo. According to a report by Kotak Economy, the RBI is: 1) unlikely to change the repo rate; 2) going keep CRR unchanged; 3) likely maintain the policy stance at ‘calibrated tightening’.
The RBI Monetary Policy Committee, in its last policy, had estimated inflation at 3.9-4.5% in second half of the financial year 2018-19. “We estimate inflation at 2.9-4.3% in the period,” it said.
“The softer-than-expected inflation prints are on the back of benign food inflation, especially as most Kharif crop prices remain well below the MSP prices. While softer retail fuel prices will push core inflation lower, there will be a significant divergence from headline inflation mainly on the back of higher prices of education and health,” the report said.
The MPC will maintain its stance, possibly until core inflation reduces to around 4-4.5% on a sustained basis, Kotak Economy projected.