Why Urjit Patel chose for status quo and a possible rate cut is on cards

The Reserve Bank chose for the status-quo at the Wednesday policy review to "pause and reflect" on incoming dataprints, Governor Urjit Patel said, hinting rate cuts are possible if headwinds to inflation do not materialise.

On the surprising dip in inflation lately, Patel said more dataprints are needed to ascertain its durability.

Even as the central bank lowered its inflation forecast sharply to 2.7-3.2 per cent for the second half of the fiscal, it cited upside risks like food prices, impact of the minimum support prices hikes on inflation, crude prices and global financial markets.

"If the upside risks we have flagged do not materialise or are muted in their impact in the incoming data, there is a possibility of space opening up for commensurate policy actions," Patel said, hinting a rate cut.

But many analysts and banks interpreted the tone of the Governor and the MPC as indicating a long pause, and ruled out any adverse action by the Mint Road at least for the next two-three quarters.

Patel seemed to suggest that the status quo on the rates and the stance was pending clarity on the data points.

"Given the assessment that growth will likely remain healthy for the rest of the year, the MPC (monetary policy committee) retained its stance at calibrated tightening so as to buy time to pause, reflect and undertake future policy actions with more robust inflation signals," he told reporters at the post-policy customary presser.

The RBI retained its full-year growth forecast at 7.4 per cent, though many analysts have lowered the same to 7.1-7.3 percent after the drastic fall in the second quarter numbers. Deputy governor Viral Acharya said volatilities in dataprints made the decision somewhat difficult.

He said even though the present numbers are lower, the MPC projection is still showing inflation to be at 4.2 percent--above the medium term target of 4 percent -- for the second quarter of the next fiscal.

"Recent dataprints have created massive uncertainties. We really need sometime to assess the inflation outlook better and then we will be able to take further policy action if necessary," Acharya said.

Warning the Central and state governments against a spending spree ahead of the polls, Patel warned that fiscal slippage by both the states and the Centre will have an impact on inflation prints.

In the fifth bi-monthly policy review, the RBI's rate setting panel retained the repo rate at 6.5 per cent and as also the stance.

It also kept the cash reserve ratio (CRR) unchanged at 4 percent, amid widespread speculation over a possible cut to help quickly push liquidity into the system.

Banks have to mandatorily keep 4 percent of their total deposits with the central bank in the CRR window, and earns no interest on this.

Even a half-a-percentage cut in the CRR would have resulted in a good liquidity inflow as the system-wide deposits stood at Rs 118.25 trillion for the week ending November 9, according to the latest RBI data.

When asked about leaving the CRR unchanged, Patel said this (CRR) does not come under the ambit of the MPC, and also other alternatives which make us believe that a CRR cut will not be needed now.

"We see no reason to use CRR when we've so many instruments at our disposal...which we've implemented over the past two months for liquidity management,and which are broadly market-based with some incentives," he said.