Reserve Bank of India keeps policy repo rate on hold, revises down inflation projection significantly

The Reserve Bank of India kept its policy repo rate on hold at 6.50 percent today, as was widely expected. Nevertheless, the central bank did not revert its policy stance of ‘calibrated tightening to ‘neutral’ in spite of a material reduction in its inflation estimates.

Today’s decision to stand pat was unanimous. Only one of the six Monetary Policy Committee members voted for a change in stance to ‘neutral’. The central bank also cut its inflation projection significantly. Inflation is projected to reach 2.7 percent - 3.2 percent in the second half of FY19 and 3.8 percent – 4.2 percent in the first half of FY20. Interestingly, the central bank now anticipates inflation stay around 4 percent in the next 12 months.

Looking at the policy statement, it seems that the RBI does not regard the weakness in inflation as widespread but rather confined to softer food and energy prices, noted ANZ in a research report. In indicated to price stickiness in the non-food group of the inflation basket. The interpretation is that lower non-food prices would be a prerequisite to a shift in policy stance, stated ANZ.

The RBI continues to be relatively confidence on growth prospects. Even if the economic growth has decelerated to 7.1 percent year-on-year in the July to September quarter from prior 8.2 percent, if underlined that the evolution of growth was widely consistent with expectations. The growth forecast for full year FY19 is 7.4 percent, suggesting growth of 7.2 percent to 7.3 percent in the second half of the fiscal year, stated ANZ. Rebounding factory utilization rates and the fall in crude oil prices should give an impetus to growth. However, the decelerating global growth environment presents a downside risk to growth.

The rebounds in both the manufacturing and services PMIs for November notwithstanding, several coincident indicators are hinting at softer growth. Problems in the non-bank financial firms and tighter fiscal policy would become additional headwinds to growth.

“We anticipate that non-food inflation will ease and allow the RBI to revert to neutral stance at its next policy review during 5-7 February 2019”, added ANZ.