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April 04, 2019

Sliced again

Monetary Policy Review

The development


  • The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) cut the policy rate by 25 basis points (bps) in its first bi-monthly policy statement for fiscal 2020. Four of the six MPC members voted in favour of a rate cut, while the other two suggested a pause. Consequently, the repo rate now stands at 6.00%, and the reverse repo and marginal standing facility (MSF) rates, at 5.75% and 6.25%, respectively. The MPC maintained its neutral policy stance, in a 5-1 vote.
  • Today’s policy decision was based on the following factors:
  • i) Continuous subdued inflation and reduction in inflation expectations; ii) Slower-than-expected domestic growth. In the second half of fiscal 2019, gross domestic product (GDP) is forecast to log a growth of ~6.5%. Additionally, some of the high frequency indicators such as growth in manufacturing and capital goods, IIP, auto sales, etc, point to significant moderation in activity, amid a slowing global economy.
    • Since August 2018, consumer price index (CPI)-based inflation has remained below the RBI’s medium-term target of 4%, reaching a 19-month low of 1.9% in January. It picked up marginally in February to 2.6%, albeit supported by a weak base and uptick in prices of some food categories. The MPC projects headline inflation to remain soft in the near term. It has revised its projections downward as follows: 2.4% in the fourth quarter of fiscal 2019, 2.9-3.0% in the first half and 3.5-3.8% in the second half of fiscal 2020. At the same time, it did acknowledge the monsoon risk from El Nino conditions and highlighted ambiguity in oil price movement.
    • The Central Statistics Office (CSO) recently revised its GDP growth estimate for fiscal 2019 downwards by 20 bps to 7.0%, indicating a slowdown from 7.2% in fiscal 2018. The MPC acknowledged that there are some signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital goods. The MPC also noted that moderation of growth in the global economy might impact India’s exports. Accordingly, it revised its GDP growth forecast for fiscal 2020 downwards to 7.2% from 7.4% earlier. CRISIL expects GDP to grow at 7.3% in fiscal 2020 with a possible downside risk from the monsoons. Private weather agency Skymet has forecast the possibility of a below normal monsoon, citing risks from El Nino.