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The six wise men that form the Monetary Policy Committee of the central bank will be putting their heads together to debate whether India’s policy rates need to be cut further to rev up the slowing economic engine. Or, if any further rate cuts must be put on hold given that retail inflation has over-shot its mandated target of 4 percent (plus/minus 2 percent). A rate hike, in the current scenario, is ruled out primarily as the RBI remains in an ‘accommodative stance’.
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Reserve Bank of India’s Monetary Policy Committee (MPC) will hold its three-day meeting from April 4-April 6, and announce its decision on Thursday, April 6.
CNBC-TV18 polled ten economists and bankers to gauge what could be expected. The responses were divided. Half of those polled expected a quarter of a percentage point cut in the repo rate, from 4 percent currently to 3.75 percent. They believe RBI may front-loan the cut to ensure more transmission by banks to spur growth. Here, the theoretical assumption is that lower rates would mean more incentive for firms to borrow and spend on capital expenditure. This would result in more output or production, which would also help create more jobs, and all of this would add up to ensure higher economic growth.
The central bank has cut rates by 115 basis points (one basis point is 1/100 of a percentage point) or 1.15 percent since February. Transmission, on the other hand, has not kept pace despite linking new loans directly to the repo rate. Sure, some large banks like State Bank of India have transmitted a large chunk of RBI’s cut. But on average, transmission into lower lending rates by banks has averaged about 72 basis points.
On the flip side, some believe that it is this inadequate transmission that may also cause the RBI to maintain status quo, and wait for more transmission by banks before it lowers rates even further.
But more importantly, it is the sharp price rise in the economy that may tie the regulator’s hands. The other half of the respondents to CNBC-TV18’s poll expect a pause from the MPC on Thursday.
MPC’s primary objective is inflation targeting. If retail inflation, as measured by Consumer Price Index (CPI), remains within the 2 to 6 percent band, RBI would have done its job, on paper. Thus, the CPI inflation reading for June at 6.09 percent - at the upper end of RBI’s comfort zone- should prevent it from cutting rates any further, but its not that simple a decision.
If the MPC’s past few statements are anything to go by, reviving growth has become the key priority. In its last statement on May 22, the MPC noted that it would retain its accommodative stance “as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target.”
Fifty percent of the respondents to the poll said that they estimate CPI inflation for the current financial year to be below the targeted 4 percent average, but thirty percent believe CPI will over-shoot this mark. The remaining two refrained from giving an inflation forecast.
The central bank has also stepped away from its conventional practice of giving out an estimate for GDP growth. In his last post-policy address on May 22, Governor Shaktikanta Das said “gross domestic product (GDP) growth will be in negative territory in 2020-21 as the outbreak of coronavirus has disrupted economic activities,” without putting a number to it. Interestingly, in its financial stability report published this month, RBI assumed GDP growth at -4.4 percent under the baseline scenario, and at -8.9 percent in a very severely stressed macro scenario. These came with a disclaimer that the GDP assumption was made under stringent hypothetical adverse economic conditions and should not be interpreted as the bank’s forecast.
Half the respondents polled said RBI may forecast a -4 percent to -5 percent range for FY21 GDP, whereas 40 percent said the central bank may refrain from giving any forecast.
“Having front-loaded the rate cuts and with inflation still above the 6% mark, the MPC may decide to wait and watch and take a pause in August to monitor India’s progress in its fight against the virus – both from a health and economic point of view,” noted Kotak Mahindra Bank’s Consumer Banking Head- Shanti Ekambaram. The bank’s economist had a different take.
“The recent high inflation readings have made the rate cut call a close one, however, we continue to see 25 bps of further easing in August followed by a pause,” said Upasana Bhardwaj, Chief Economist at Kotak Mahindra Bank.
Mandar Pitale- Head, Treasury, SBM Bank India said, "There is a significant likelihood of MPC members voting for a pause during the forthcoming review. The extent of frontloaded easing already carried out and lingering immediate uncertainty about inflation trajectory for the next couple of months may weigh the rate decision."
When we asked the respondents about the total quantum of rate cuts expected for 2020, seven out of ten said there would be a 50 basis points reduction, whereas the other three predicted a 25 basis point cut.
In non-monetary policy action, India Inc is keenly awaiting any announcements on further relief measures for banks and borrowers. A one-time restructuring scheme or any extension of the six-month moratorium ending on August 31 are among the key interest areas.