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RBI policy on December 5: Will MPC cut rates for the sixth time in 2019?

Updated : December 03, 2019 18:21:21 IST

The Reserve Bank of India (RBI) will deliver its monetary policy on December 5.

CNBC-TV18's Latha Venkatesh is in conversation with the Citizen's monetary policy committee (MPC) members -- Pronab Sen, former chief statistician, Sajjid Chinoy, chief India economist at JPMorgan, Samiran Chakraborty of Citi, Sonal Varma of Nomura and Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, to get their views.

“On a sequentially adjusted annualised rate basis, gross domestic product (GDP) is at 3.6 percent. So there is no doubt about it. Demand is very weak for both investment and for private consumption. In terms of the future trajectory, other than the global reasons for India’s economic slowdown, clearly, credit conditions being tight have been one of the reasons for this deceleration. Our view is that the underlying credit issues have still not been resolved and therefore Q3 is unlikely to be significantly better than Q2 numbers. Therefore, for the full FY20, we are staring at potentially a growth number below 5 percent,” Varma said.

“We are looking at growth downgrades not just for FY20 but also for FY21 and a fairly prolonged period of output gap staying negative,” she added.

In terms of RBI’s views on GDP for the current year and the next year, Ghosh said, “The central bank knows that the growth conditions are weak. Another point along with GDP data was the credit growth data. It shows an incrementally 82 percent decline in the April to October overall credit growth over the last year. The entire GDP data in Q2 has been driven by the government without which the number drops to 2.8 percent. So given the conditions, the RBI will be fairly clear in the policy that the growth is its first priority.”

“Hopefully the central Bank could look through the numbers as a seasonal one and say that growth is their priority and they are going to stay in an accommodative mode perhaps for a longer period than what the market anticipates,” Ghosh added.

According to Chakraborty,  policymakers are always a bit more optimistic than market analysts in predicting longer-term growth.

"I don’t think the FY21 growth will be cut as much as the FY20 growth. There will be always that hope that stimulus that has been taken both from the monetary side as well as from the fiscal side will walk through the system over the next few quarters and that will probably make the growth numbers look somewhat better,” he observed.

Speaking about inflation, he said It was primarily a supply-side problem in a demand constrained economy. "At this point they say that this is very much concentrated in a few food items and maybe point to the fact that we will see whether this is getting more generalised into other items as well. The challenge is that this more than 5 percent inflation is going to stay for at least three months and what it does to inflation expectations, what it does in terms of cost-push pressures on other kinds of price inflation, that is something which they will have to watch closely. So it is going to be a tough call on inflation for sure,” Chakraborty stated.

Chinoy draws attention to the impact of global issues on the Indian economy.  "The question is does the global economy become a headwind as we thought it would three months ago or is it a modest tailwind? I think there the news is slightly better. If you look at what is happening globally, there has been a huge negative sentiment shock for the last year based on geopolitical concerns, the US-China trade war and Brexit. Thankfully and fortunately, all those risks, those tail risks have begun to ebb. So we at JPMorgan think that over the next six months the global economy is getting primed for a reasonable lift going into 2020,” he opined.
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