RBI unlikely to cut interest rates as growth slows: Poll

Economists expect central bank to maintain 'neutral' policy stance

Economists don’t expect the six-member Monetary Policy Committee (MPC) to tinker with policy rates of the Reserve Bank of India (RBI) when it meets this week. 

Twelve economists polled by Business Standard ruled out a rate cut by the central bank even as growth numbers slowed down and inflation surprised most on the downside. The MPC is scheduled to meet on Tuesday and Wednesday.

Economic growth fell to 6.1 per cent in the fourth quarter as demonetisation affected consumer spending. The consumer price index-based inflation rate eased to 2.99 per cent as food prices moderated.  

Going forward, economists don’t see much of a scope for prices to rise in the immediate term, considering the prospects of a good monsoon and largely stable crude oil rates.

This is well below the RBI’s rate own target of keeping the inflation rate anchored around 4 per cent. But growth should rebound as the negative effects of the note ban are largely expected to be transitory. 

“Not many are thinking of a rate cut at this point. It should be a pause,” said Kaushik Das, India economist at Deutsche Bank. 

All other economists also said the central bank was unlikely to rush with a rate cut seeing the fourth quarter gross domestic product numbers. Low inflation, which HDFC Bank’s Chief Economist Abheek Barua expected to continue for a few more months, is not necessarily something that would be permanent. And, therefore, the stance of the policy would still continue to remain “neutral”, which the central bank adopted in the December policy, having kept the stance at “accommodative” for many quarters.  

CARE Ratings’ Chief Economist Madan Sabnavis also expected the stance to continue to be neutral.

“We expect the language to be a bit cautious. It is not yet clear how the GST (goods and services tax) and the proposed increase in house rent allowance component for government employees would impact inflation. But the monsoon and crude oil parts have already been addressed,” said Sabnavis, adding the central bank would rather “wait and watch” before moving on the rates. Kotak Mahindra Bank’s Upasna Bhardwaj said the RBI’s statement may acknowledge the softer growth and low inflation and therefore “the overall tone of the policy could be softer than usual”.

Source: Business Standard Survey, Reports

“The RBI may highlight that future action would depend on realised inflation print after monsoon and GST implementation,” said Soumyajit Niyogi, associate director at India Ratings and Research.

According to Nomura’s Chief India Economist Sonal Varma, while both growth and inflation signals were still reeling under the effects of demonetisation, these were transitory. 

“High-frequency data confirm that growth recovery is getting back on track. Additionally, with a number of other transitory factors also affecting inflation… and several uncertainties in the pipeline…, it is best to wait for data to stabilise before making any judgement,” Varma wrote in her report. 

According to Pranjul Bhandari, chief India economist for HSBC, it could be time the RBI adjusted its inflation forecasts to strengthen its credibility. 

“We expect it to lower its inflation forecast for FY18 at the coming June 7 meeting. We continue to expect the RBI to be on a prolonged pause but with risks of a 25-basis point rate cut in August if certain conditions are met,” Bhandari wrote in her report.

A factor helping the central bank in keeping inflation under control was a stable exchange rate. Benign crude oil prices were helping the stability of the currency as well and this would keep the current account deficit under check, according to IndusInd Bank chief economist Gaurav Kapur. 

Overall, according to Kapur, a “status quo” on rates was a foregone conclusion and was widely anticipated.