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The Reserve Bank of India will likely take advantage of expectations that inflation will remain low in the near-term and change its policy stance back to ‘neutral’ from ‘calibrated tightening’ at its February meeting.
That will be a test for the new Governor Shaktikanta Das, who’s policy bias will be watched carefully as the risk for future inflation is still skewed towards the upside.
India’s CPI inflation eased to 18-month low of 2.19 percent in December, down from 2.33 percent a month ago. Although the core consumer inflation, which excludes volatile food and fuel, has remained sticky at 5.7 percent.
Increased government spending ahead of national elections in May, is expected to be inflationary.
“We expect a more dovish monetary policy under the new governor Das. We do not foresee a rate hike anymore this year. Should inflation pressures be contained (the real policy rate is currently around 4 percent) and the current account remains under control, the RBI may even opt for one or more rate cut,” noted ABN Amro.
As per the mandate, the central bank has been mainly focusing on inflation-targeting, but the Modi-led BJP government seems to prefer a stimulative monetary policy stance to boost growth ahead of the general elections in May.
In a recent ironic twist, the central bank, under the new leadership of Governor Das, is expected to transfer an interim dividend of 300-400 billion rupees to the government by March. That would be about four times the amount paid in 2018.
"We foresee that it will be difficult for the BJP to seize a powerful majority in India's Lower House, which means Modi's party will have to resort to coalition-based policymaking," noted Hugo Erken, senior economist at Rabobank.
"Under this scenario, we can expect the BJP's business-friendly reform agenda to stall and the odds of breakthroughs on land and labour market reforms will be marginal at best. These reforms are necessary to prevent a levelling off of potential growth."
