After the RBI’s policy announcement, the bond market staged a muted rally but the curve in the one-year overnight indexed swap, a derivative gauge where investors exchange fixed rates for floating payments, started indicating another rate cut. So, a new cycle has begun even though it could turn out to be a shallow rate cut cycle.
The retail inflation projection has been revised downwards to 2.8 per cent in the March quarter of the current year — 3.2-3.4 per cent in the first half of fiscal year 2020 and 3.9 per cent in the third quarter of 2020 with risks broadly balanced. The downward revision takes into account the continuing deflation in food items, larger than anticipated moderation in fuel prices and an assumption of normal monsoon in 2019.
Since, it is all the way below 4 per cent, which MPC has been trying to achieve on a durable basis (with a plus/minus 2 per cent band), the focus has shifted to growth. Das is distinctly dovish as RBI’s inflation projection is benign and he wants to seize the opportunity to support growth. Hence the rate cut — and this may not be the last one.
A different approach: The new governor’s first monetary policy is different from his predecessors. In his scheme of things, the monetary policy does not necessarily need to be tight when fiscal policy is rather loose
At the post-policy interaction with the media in December, former RBI governor Urjit Patel had said that if the upside risks to inflation would not materialise, there could be a possibility of space opening up for appropriate RBI action. Das has seen this “opened up” and the MPC acted on it. “..the path of inflation has moved downwards significantly, and over the period of next one year, headline inflation is expected to remain contained below or at the target of 4 per cent. This has opened up space for policy action..”.
In that sense, there is no surprise but most analysts (including this commentator) expected that sticky core inflation, a strong dollar and extreme volatility in the oil price would influence the MPC to be cautious. Besides, the fiscal slippage and a semi-inflationary interim Budget would queer the pitch. The MPC admits that the Budget proposals might boost aggregate demand by raising disposable incomes but does not see any imminent risk to the inflation outlook.
Das feels “the favourable macroeconomic configuration that is evolving” underscores the need to act now “when it is most opportune”. “..it is vital to act decisively and in a timely manner to address the objective of growth once the objective of price stability as defined in the (RBI) Act is achieved,” he said, adding, “the decisions of the MPC will be data-driven and in consonance with the primary objective of monetary policy to maintain price stability while keeping in mind the objective of growth”.
“The shift in stance of monetary policy from ‘calibrated tightening’ to ‘neutral’ also provides flexibility and the room to address challenges to sustained growth of the Indian economy over the coming months. As long as the inflation outlook remains benign,” he said. Incidentally, the RBI has revised its forecast for GDP growth in 2020 to 7.4 per cent from 7.6 per cent earlier.
While the decision to change the stance was unanimous, two MPC members voted against the rate cut —Chetan Ghate and deputy governor in charge of the monetary policy Viral Acharya. Interestingly, Michael Patra (the third RBI representative on the MPC beside Das and Acharya), a known hawk, has also voted for a rate cut. This is as much a surprise as the rate cut itself. Had Patra stuck to his known stance, there would have been a tie and Das, at his first MPC meeting, would have been required to exercise his casting vote.
The new governor’s first monetary policy is different from his predecessors. He is in favour of pushing for growth and not overawed by the risks of rising inflation. He also does not seem to be overly perturbed on fiscal slippages. In his scheme of things, the monetary policy does not necessarily need to be tight when fiscal policy is rather loose. In that sense, he seems to be a cheerleader for growth.
The writer, a consulting editor of Business Standard, is an author and senior adviser to Jana Small Finance Bank.