Will the RBI shift its monetary stance to neutral?
A recent survey by Reuters had pointed out that while the RBI may not cut rates in February, there was a strong chance of the RBI changing its stance. In the December policy, the RBI had chosen to maintain the monetary stance at hawkish despite maintaining status quo on rates. However, it is expected that the RBI could shift its stance to neutral in this policy. What could this decision predicate on?
Watch the Fed move
An important cue for the RBI will be the US Fed policy, The Fed monetary policy will be announced on January 30th and that gives the RBI enough time to mull its strategic choices based on the Fed outcome. The CME Fed Watch Tool is almost assigning a 100% probability to status quo on Fed rates. If the language of Jerome Powell is also dovish, then the RBI may have an incentive to adopt a dovish tone. The Fed has some real problems on hand. The trade war with China is showing no signs of receding and that is likely to hit growth. China has already given lower growth guidance and the IMF believes that US growth could also falter by 20 to 30 bps in the coming year. In these conditions, the Fed may not have a real appetite for any further rate hikes. The Fed will also worry that another rate hike will make the dollar stronger and do greater disservice to American exports. Fed is most likely to maintain status quo on rates and also talk dovish.
What about inflation?
This could be one of the key factors driving the RBI to change its stance. The CPI inflation for December 2018 came in at an 18-month low of 2.19%. That is close to the lower end of the inflation band that the RBI is happy with. But this low inflation has been achieved on the back of weak oil and food inflation. If the government plans a massive farmer rescue package and rural investment program, then the lagging rural inflation could pick up quite rapidly. Also, oil continues to be the joker in the pack and the last few months have seen tremendous volatility in oil prices. As the swing status shifts from the Middle East to the US, this kind of volatility is bound to happen. The RBI may also want to be watchful on the base effect front with inflation normally picking up around the first half of the year. That could be a tough call.
Strategic shift in stance
The RBI may look to shift its stance to neutral for a very specific reason. With elections approaching, the government would not want to put the banks and NBFCs at risk with higher yields. They are, after all, the last mile for the delivery of the government’s proposed largesse to farmers. Purely as a comfort factor and to keep yields at the lower end, the RBI may choose to change the stance to neutral. That may not be indicative of future rate cuts!
