The Reserve Bank of India’s (RBI) monetary policy committee (MPC) sees scope for a future rate cut but the timing will be critical, reveal the minutes of the meeting released by the central bank. Earlier this month, the MPC had left its benchmark repo rate unchanged and maintained its accommodative policy stance to revive growth and keep inflation within target.

“Barring the intensification of global risks, there is policy space that needs to be timed optimally and opportunistically to maximise its impact on growth,” RBI governor Shaktikanta Das said during the meeting.

The MPC, in its previous meeting in Dec 2019, had projected consumer price inflation (CPI) at 5.1-4.7% for he second half of the FY20 and 4.0-3.8% for the first half of FY21 with risks broadly balanced. However, the actual inflation outcome for the second quarter at 5.8% overshot projections by 70 basis points, primarily due to the intensification of the onion price shock in December 2019 on account of unseasonal rains in October-November last year.

In its Feb meeting, based on a variety of factors and on the assumption of a normal southwest monsoon, the MPC revised its consumer price inflation (CPI) projection upwards to 6.5% for the fourth quarter and to 5.4-5% for the first half of FY21, and 3.2% for the third quarter of FY21. In a Nomura research note, economists Sonal Varma and Aurodeep Nandi, write that the (MPC) minutes seem to suggest that the policy pause has been a reluctant one; largely in acknowledgment to the sharp upsurge in inflation.

The other crucial factor for the MPC was moderation in the gross domestic product (GDP) growth rate. It is noteworthy that, last month, the National Statistical Office (NSO), in its first advance estimates for FY20 had placed India’s real GDP at 5%. Later, on Jan 31, the NSO revised real GDP growth for FY19 to 6.1% from its May 2019 provisional estimates of 6.8%.

In Dec, the MPC had projected real GDP growth for FY20 at 5%, between 4.9-5.5% in the second half of FY20 and 5.9-6.3% in the first half of FY21. At its Feb meeting, the MPC pegged FY21 GDP growth at 6%-5.5-6% in the first half of FY21 and 6.2% in the third quarter of FY21. In support of its projection, the MPC counted various factors to support the higher GDP growth which included recovery in rural private consumption on back of improved rabi crop prospects, the recent rise in food prices shifting the terms of trade for agriculture, easing of global trade uncertainties, monetary transmission in lending rates and financial flows, and the rationalisation of personal income tax announced in the Budget. “The breakout of the coronavirus may, however, impact tourist arrivals and global trade,” the MPC cautioned.

Rahul Bajoria, chief India economist at Barclays, says that given the current growth-inflation dynamic, scope for further easing may open up only in the second half of the fiscal year. In a research note, Bajoria wrote that while (MPC) members noted green shoots across a wide variety of growth indicators, they acknowledged that sustainability was key. “Moreover, rising concerns over the global growth outlook, weak levels of capacity utilisation and uncertainty over the impact of corporate and personal tax cuts were some of key considerations warranting cautious optimism on the growth outlook,” Bajoria noted.

Bajoria also pointed out that the minutes revealed contrasting views on describing the quality of fiscal spending and its implications for growth and inflation going forward. “While Dr. (Ravindra H.) Dholakia termed the just-concluded budget as effectively contractionary in nature; Dr. (Chetan) Ghate saw some inflationary concern from the 1.2% slippage combining the benefits of corporate, personal income and GST tax rate cuts.”

“The majority of members saw some space for further easing, calling it only a question of timing, so as to optimise the impact,” Bajoria wrote. He also highlighted that, at the MPC meeting, Ghate had said that there was no further space for rate cuts, and argued that fiscal uncertainty would call for tighter-than-warranted monetary conditions. “If growth hasn’t revived with a 135 basis point cut in the policy rate, and a tax stimulus amounting to 1.2% of GDP, then the need of the hour is more structural reform,” Ghate said at the meeting.

Interestingly, Nomura analysts also believe that the key question for the MPC is not ‘if’ more policy easing will happen, but rather, ‘when’ it can be delivered. “We continue to expect a 25 basis points rate cut in Q2(-FY21) with some probability that this could be delivered in April as well, as growth is likely to disappoint, while inflation has already peaked,” Nomura said.

The other important discussion factor was coronavirus, which found a dozen mentions across the minutes with each of the six members taking it up in their respective discussions. The MPC members flagged the uncertainty the epidemic lends to global demand and potentially higher inflationary pressures.

On his part, RBI governor Shaktikanta Das hailed the Budget as seeking to provide counter-cyclical support to the economy while broadly adhering to fiscal prudence. “While the macroeconomy needs further monetary stimulus, the inflation outlook continues to be uncertain,” Das said at the meeting. “The path of headline inflation is expected to moderate, but given the prevailing uncertainty, it is prudent to await more clarity based on incoming data,” Das added. “Financial stability also requires revival of the growth trajectory.”

Das voted for keeping the policy repo rate on hold and for maintaining the accommodative stance as long as necessary to revive growth while ensuring that inflation remains within the target. “It is important not to discount the RBI,” Das said post the meeting, conveying that a further rate cut is now a matter of ‘when’ and not ‘if’.

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