After a breathless run of five consecutive rate cuts, beginning February, the Reserve Bank of India (RBI) decided to pause and catch its breath in the December policy announced on Thursday. And rightly so too. Though growth concerns are still paramount, a lot has changed between the earlier policies and now — inflation is rearing its head up again and the government’s approach to the fiscal deficit glide path is still unclear even as the macro numbers indicate a considerable slippage in the target of 3.3% for this fiscal. Monetary policy works with a lag and the 135 basis points cut since February needs to percolate down through the system and its impact analysed. The RBI runs the risk of blunting the repo rate weapon if it continues to cut rates without the cuts being transmitted down the line. The Monetary Policy Committee (MPC) has taken care to point out that “there is monetary policy space for future action” and that the accommodative stance will continue. This should smoothen the ruffled feathers of the market which was expecting a 25 basis point cut. In that sense, the RBI has surprised the market after a long time, but also clearly indicated that facilitating growth is still at the top of its agenda.
Though the Governor, Shaktikanta Das, went out of his way to clarify that fiscal concerns were only one input in the decision, it is obvious that the MPC wants to watch the government’s moves in the budget before easing rates again. A cut now followed by a big slippage on the fiscal deficit would have complicated matters for the MPC. Acknowledging the dismal growth in the second quarter, the MPC has revised the growth projections for fiscal 2019-20 sharply downwards to 5% from the 6.1% it had projected in the October policy. How did the MPC go so much off the mark? The Governor has referred to green shoots in the economy such as in the rise in the November Purchasing Managers’ Index for manufacturing and the late catch-up in rabi sowing. He also referred to a study of the unaudited financial results of 1,539 listed companies which shows companies shifting funds from financial investments into fixed assets indicating a possible revival in the capex cycle. But these are early days yet and incoming data need to be watched carefully before a final assessment can be made. On inflation, the central bank has projected a significant rise in the second half of this fiscal but it is sanguine that the spike is temporary driven largely by rising prices of food items due to unseasonal rains that destroyed standing kharif crops. All things considered, this seems to be a strategic pause by the MPC to watch how inflation moves and what the government does in the budget. The rate cut cycle still has some steam left.