Slowing inflation is likely to prompt the monetary policy committee (MPC) of the Reserve Bank of India (RBI) to hold the key policy rate or the repo rate in the fifth bimonthly monetary policy review of 2018-19 scheduled for Wednesday.
The retail inflation rate — the yardstick used by the RBI for monetary policy purposes — slowed in October to 3.3%, the slowest pace in 13 months. Consumer price index-based inflation or retail inflation remained below the 4% target of the RBI for the third straight month. Inflation is likely to decline further as crude oil prices dropped below $60 a barrel in November.
“The MPC, in its meeting, due on December 3-5 will likely keep repo rate unchanged,” economists at Kotak Securities said in a report. In the October policy, the repo rate was kept unchanged at 6.5%.
While the central bank estimated retail inflation to be in the 3.9-4.5% range for the second half of the current financial year and 4.8% for the first quarter of 2019-20, Kotak Securities expects inflation to undershoot the RBI estimate. “We estimate inflation at 2.9-4.3% in H2FY19 and 4.5% in Q1FY20,” the report said. The market will be looking for liquidity-boosting measures from the central bank, including reduction in the cash reserve ratio (CRR), even if the RBI has changed its monetary policy stance in the last review meeting to calibrated tightening, from neutral. The change in stance indicates that interest rate can only go upward.
‘Inadequate infusion’
The recent decision of the RBI to infuse ₹40,000 crore liquidity in December through open market operations has been seen as inadequate by market participa0nts. A report from Bank of America Merrill Lynch estimated the current liquidity deficit at ₹1 lakh crore, which could go up to ₹1.4 lakh crore after corporate advance tax outflows start by the middle of this month. “As the busy industrial season deepens, this would further exert pressure on lending rates.
“Our liquidity model estimates suggest that the RBI will need to conduct OMO of another ₹1.6 lakh crore in the March quarter. Alternatively, the RBI could cut CRR by 1% of bank book, releasing ₹1.2 lakh crore, to arrest lending rate hikes, with inflation [being] benign,” the report said.
“RBI should refrain from using the CRR now as liquidity is strained only in pockets and it is not a system-wide crisis, Kotak Securities said.
“Recently, there has been noise about using CRR to infuse liquidity… We believe that the use of CRR should be restricted to being a ‘shock’ rather than as a regular tool for liquidity management, ” the brokerage said.
