Since the last monetary policy announcement, conditions had become more favourable for an easy monetary stance as GDP growth projection has been revised downwards; central banks in advanced countries have hit the pause button; and the rupee has appreciated.
As was widely expected, the Monetary Policy Committee (MPC) decided to cut the repo rate by 25 basis points (bps) on April 4. This is the second consecutive rate cut by the MPC, bringing the total reduction in policy rates to 50 bps in this ongoing rate easing cycle.
Since the last monetary policy announcement, conditions had become more favourable for an easy monetary stance as GDP growth projection has been revised downwards; central banks in advanced countries have hit the pause button; and the rupee has appreciated. Along the way, the RBI also acted swiftly to support liquidity in the system by conducting adequate open market operations (OMOs) and more recently, the Indian rupee-US dollar swap. Total durable liquidity injected by the RBI through OMOs aggregated Rs 2.985 trillion for fiscal 2019 and the swap of $5 billion for a tenure of three years on March 26, 2019, added further durable liquidity of `346 billion into the system.
Inflation likely to rise
It was an opportune time for the MPC to act now rather than later because we believe inflation is slated to start rising as a favourable base effect has begun to wane and prices of some of the key food categories have started going up. Since food has been the main driver of low inflation so far, uptick in food prices can start exerting upside pressure on headline inflation.
The wholesale price index (WPI) has been rising over the last two months. We believe this will feed into the CPI food inflation in the coming months. The possibility of El Nino and its impact on the monsoon also poses a risk to food prices. At the same time, the budgetary and political announcements (income support for the poor), if implemented properly, would add an upside to inflation. The RBI does not see the risks to inflation as material at this point as reflected in the downward revision of inflation trajectory for fiscal 2020. Also, the recent rise in crude prices, if sustained, and the rising probability of a sub-normal monsoon could pose a challenge to both growth and inflation outlook. Hereon, we expect the monetary policy to be data-driven.
Credit growth accelerates
Banking credit continued to post double-digit growth, registering 14.1% increase year-on-year as of March 15, 2019. However, growth was still not broad-based as industrial credit growth continued to remain anaemic.
Crisil Research expects banking credit to grow upwards of 13% on-year in fiscal 2019 and improve to 13-14% on-year in fiscal 2020, compared with 7.4% in fiscal 2018, driven by strong retail credit growth, higher disbursement to non-banks, exemption of six banks from prompt corrective action (PCA) framework and resolution of big ticket-sized stressed assets.
Transmission of rate cuts to end-consumers is expected to be gradual and relatively lower than the repo rate revisions. This is expected to aid banking sector profitability in the near term.
Edited excerpts from Crisil report ‘Sliced Again—Monetary Policy Review’