The Reserve Bank of India, which surprised the market by changing its stance from ‘accommodative’ to ‘neutral’ in February due to inflation concerns, may well be on a course correction in the second bi-monthly monetary policy review scheduled on June 7, as price increases have been lower than what the central bank had projected.
In the last policy review in April, the central bank projected retail inflation to average 4.5% in the first half of 2017-18 and 5% in the second half.
Inflation falls
However, as consumer price index-based inflation dropped below 3% in April (aided by food prices not rising as expected and with international crude oil prices staying benign), economists said inflation will trend far below the central bank’s projected trajectory.
“We now expect CPI to stay below 3% until September (with a sub-1.5% also a possibility) before moving up, but staying below 4% until December,” Soumya Kanti Ghosh, chief economist of State Bank of India, said in a report. For FY18, CPI inflation average could be decisively below 4% with a downward bias, he said.
The question is whether the RBI also agrees that inflation would be trending below the projected figures and would change its tone, if not stance, accordingly.
Neutral stance
Technically, a neutral stance means there is a scope for further reduction of the repo rate — which is at 6.25% — but the central bank’s hawkish tone in the last two policy reviews made the yields on benchmark government bonds head north since the market interpreted interest rates have bottomed out.
“While many believe that RBI’s change of stance from ‘accommodative’ to ‘neutral’ may have been hasty, we believe the central bank did have some ‘special reasons’,” said Pranjul Bhandari, Chief India Economist, HSBC in a note. “However, we also believe that it’s time the RBI adjusts its inflation forecasts to strengthen its credibility. We expect it to lower inflation forecast for FY18 at the June 7 meeting. We continue to expect the RBI to be on a prolonged pause but with risks of a 25 bps rate cut in August if certain conditions are met,” Ms. Bhandari said.
