RBI governor's concerns on growth may not lead to rate cuts in February

Shaktikanta Das reiterated that growth should be taken care of even during inflation battle

Reserve Bank of India (RBI) governor’s concerns about growth may not translate into outright rate cuts in the February policy, say economists, but there is a possibility of a change in stance from “calibrated tightening” to “accommodative”. 

RBI Governor Shaktikanta Das on Friday reiterated his stance that growth should be taken care of even as the RBI fights the inflation battle. According to the RBI’s legislative mandate, the central bank needs to maintain price stability “keeping in mind the objective of growth”. This does not explicitly bind the central bank to take care of the growth, but to keep that consideration in mind. 

Interestingly, in his speech at the Vibrant Gujarat Summit, he cited his October tweet, which read, “Central Banks across countries have a very critical role at the current juncture. The challenge is to try and read the situation and take decisive steps in pursuit of their multiple responsibilities.” 

Das said in his Friday speech that as the RBI governor that he would “endeavour to act according to these principles”. 

Economists, however, are not reading too much into this. In the same speech, Das said the three key policy challenges for the RBI are inflation, financial sector and external sector. 

“Maintaining price stability in the economy is a basic mandate for a central bank. Delivering low inflation by the central bank induces greater confidence among domestic and global investors,” Das said in his speech. The CPI inflation reading in December was at 2.2 per cent. This has positively surprised many analysts, but underlying pressure remains. 

For example, the State Bank of India (SBI) group Chief Economic Advisor Soumyakanti Ghosh pointed to the fact that even as urban inflation has fallen, in line with an overall decline in headline inflation, rural inflation has actually risen between August and December. 

“Rural and urban inflation has a positive correlation, they move in the same direction. But it has broken down in the last two-three months. This could be a statistical aberration due to methodological change in data collection, or this may indicate that rural demand has collapsed. This, therefore, doesn’t give much scope for a rate cut,” said Ghosh. 

However, Ghosh said it was true that growth has fallen and the central bank will have to cut rate going forward, but it may not come in the February policy. 

Axis Bank chief economist Saugata Bhattacharya said instead of cutting rates, the RBI might want to first bring down the rates on fixed income papers through liquidity infusion. Even as the government bond yields have come down significantly and the 10-year bond yield is at 7.31 per cent now, from above 8 per cent just three months back, the corporate bond yields have not come down to that extent. This has widened the spreads between the two, making it costly for the private entities to raise funds. 

RBI’s decision to infuse about Rs 60,000 crore extra liquidity in December and January and its resolve to infuse more if needed, will help bringing down the spread. The central bank may want to wait out till April to see if liquidity operations yielded desired results of bringing down private corporate yields, before moving for a rate cut even as growth shows a fall, Bhattacharya said. 

Upasna Bhardwaj, chief economist of Kotak Mahindra Bank, said growth has indeed fallen, and the policy tone would likely be dovish, with a change in stance, to indicate a near rate cut. But rate cut in the February policy would unlikely be the case. 

“A rate cut is sure to come, but the timing is difficult to say,” Bhardwaj said. 

She pointed to Central Statistics Office’s growth projection for the current fiscal at 7.2 per cent for the current fiscal, as compared with the RBI’s own projection of 7.4 per cent. 

“The RBI will have to acknowledge the growth is slowing down and revise its projections. The tilt of the policy is likely to be dovish, but at the same time, oil prices have started firming up and given that the RBI is an inflation targeting central bank, it will have to weigh its options carefully,” she said.