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  Business   Economy  06 Feb 2019  RBI to change stance to neutral but may hold rates

RBI to change stance to neutral but may hold rates

THE ASIAN AGE. | FALAKNAAZ SYED
Published : Feb 6, 2019, 3:12 am IST
Updated : Feb 6, 2019, 3:12 am IST

Higher budgeted market borrowings and increased inflationary concerns are likely to keep the bond yields elevated.

Core inflation, on the other hand, was unchanged at 5.7 per cent in December 2018.
 Core inflation, on the other hand, was unchanged at 5.7 per cent in December 2018.

Mumbai: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to hold the rates on Thursday but could change its stance from calibrated tightening to neutral. However, several economists said they would not be surprised if the RBI delivers a premature 25 basis points rate cut, as headline inflation still remains significantly benign and growth has hit a soft patch.

Those who expect the MPC to hold rates argued that the economy is likely to receive a fiscal stimulus and inflation risks have risen which would make the MPC to take a wait and watch approach.

 

The Interim Budget 2019-20 presented last week showed a strong populist bent by the government in the run-up to the general elections due in May and is likely to result in a build-up in inflation in the coming months because of me­a­sures to boost consumer spe­nding like income support schemes, interest subvention and tax exemptions. In addition, higher effective minimum support prices (MSPs), likelihood of a rise in oil prices on account of possible supply cuts by OPEC members and remo­v­al of waivers granted by the US government on the Iran sanctions are other factors which are likely to exert inflationary pressure on core components of the Consumer Price Index.

 

Meanwhile, the fiscal deficit has touched 112.4 per cent of the full-year budget target of Rs 6.24 lakh crore at the end of December on account of lower revenue collections. The fiscal deficit stood at Rs 7.01 lakh crore during April-December of the current financial year, which ends in March. Higher budgeted market borrowings and increased inflationary concerns are likely to keep the bond yields elevated.

DK Joshi, chief economist at Crisil, said, “We expect the MPC to be on hold on rates but change its stance from calibrated tightening to neutral as the Budget is expansionary and co­re inflation too remains high.”

Madan Sabnavis, chief economist at Care Ratings, said, “RBI will adopt a ‘wait and wa­t­ch’ policy and will maintain a status quo in the rates owing to expectations of build-up in inf­l­a­tion in the coming months. Factors include rise in the oil prices, increase in general sp­ending with General Elections round the corner, higher food prices with MSPs being made more effective in rabi season.”

 

The headline CPI inflation fell to 2.19 per cent to its 18 month low on the back of continued deflation seen in food prices from 2.33 per cent in November 2018. With this print, CPI inflation during Q3FY19 stands at 2.6 per cent versus RBI’s projected trajectory of 3.8 per cent released in October policy. Core inflation, on the other hand, was unchanged at 5.7 per cent in December 2018. However, core (excluding transport and communication) increased to 6 per cent in December 2018 from 5.6 per cent in November 2018. This increase was led by higher inflation in health, education, household and personal goods.

Soumya Kanti Ghosh, group chief economic adviser at SBI, said, “We now expect RBI to change stance in February, but it is likely to remain on pause mode. The first cut might happen in April 2019, but we believe it will be a shallow rate cut cycle. However, we will not be overtly surprised if the RBI delivers a 25 bp rate cut on February 7 itself.”

 

Deepak Jasani, head retail research at HDFC Securities, said, “Consistently benign inflation (though core remains high), headwinds to economic growth and nearness to elections at the time of the next meet in April are the main reasons why a rate cut can even be considered now. On the other hand, an expansionary Budget may be viewed as having inflationary lag impact, thus, negating the need to cut rates at this point.”

Tags: monetary policy committee, budget 2019-20