The fifth bimonthly review of the monetary policy, the deliberations of which started on Tuesday, and the outcome scheduled on Thursday, is probably the most challenging policy review for Reserve Bank of India Governor Shaktikanta Das, who took charge in December last.
This because, since Mr. Das’s first policy review in February, the objective has been only to revive growth as retail inflation was comfortably around the central bank’s tolerance zone of 4% .
Despite a 135-basis point (bps) reduction in the policy rate since February, growth has not revived. In fact, the country’s GDP growth dipped further in the July-September quarter to 4.5% the lowest in 26 quarters, as compared to 5% in the preceding quarter.
Now, retail inflation has started inching up. Consumer price index-based inflation was at a 16-month high of 4.62% in October, higher than the central bank’s medium-term target of 4%. The rise in inflation was mainly driven by increase in food prices. Consumer food price inflation, which amounts to half of the inflation basket, increased to 7.89% compared to 5.1% in the previous month.
Inflation is expected to inch up further in the coming months. This makes the December policy review for monetary policy members complicated.
While most of the economists are still expecting a 25 bps rate cut on December 5 as economic growth is still fragile, the question is whether the RBI will sound doveish as it did in previous policy reviews.
Since RBI has a flexible inflation targeting framework, which means a deviation from a particular target is allowed, central bank watchers said it is time to show flexibility during policy making.
In particular, the central bank should see through the recent spurt in inflation, which could be a transient phenomenon and not a permanent one.
“It should look through CPI inflation rising to 5.2% in November and 4.7% in Nov.-Feb., beyond the RBI’s 3.5-3.7% 2HFY20 projection, on onion price spike/base effects,” economists at Bank of America Merrill Lynch said in note to its clients. BofaML expects MPC to cut rates by 25 bps in the December policy and another 15 bps in February.
The question is whether the central bank will explicitly say that the rise in inflation is indeed temporary and it would look through. Such a statement would be interpreted that the central bank is open for a further rate cut.
If RBI refrains from saying so and instead comments that the future steps would depend on incoming data, the market will not take any further easing of monetary policy as a given.
