RBI may go back to 'neutral' stance in February meet, say experts

RBI said it was willing to reconsider its stance if there were favourable macroeconomic indicators

The Reserve Bank of India (RBI) on Friday decided to retain “calibrated tightening” as its monetary policy stance. Most analysts, however, feel the RBI may revert to the “neutral” stance in its next monetary policy meeting, slated for February next year.

In the fifth bi-monthly policy review, the RBI revised the inflation forecast for the second half of 2018-19 to 2.7-3.2 per cent from 3.9-4.5 per cent projected in the October policy review. Monetary policy committee (MPC) member Ravindra Dholakia voted for a change in the stance to neutral, but other members favoured “calibrated tightening”.

In the October policy review, the MPC had shifted its policy stance to “calibrated tightening” from “neutral”, implying a rate cut was off the table in the current cycle.

During the press conference after the meeting on Wednesday, RBI Deputy Governor Viral Acharya said volatility of inflation data made the decision on changing its policy stance difficult for the central bank. But the RBI said it was willing to reconsider its rate stance if there were favourable macroeconomic indicators.

“The medium-term target remains above the headline target. We need to observe the data for a couple of months first to see if these recent prints are durable or not...I think what we are saying is that we really need some time in order to assess the inflation outlook better, and then we will be able to take a further policy action if necessary,” Acharya said.

Apart from food items, inflation has remained sticky and elevated, according to the resolution of the RBI’s MPC. It added that the RBI will monitor food inflation and prices of petroleum products, which softened considerably, closely. “The prices of several food items are at unusually low levels and there is a risk of sudden reversal, especially of volatile perishable items,” the policy statement said. The impact of the revision in minimum support price (MSP) on inflation is yet to be observed and the medium-term outlook for crude oil prices is uncertain due to global demand conditions, RBI said.

Analysts said a repo rate hike this fiscal year looks unlikely despite the RBI’s stance. “Even as the MPC has stuck to its calibrated tightening stance, the possibility of another rate hike this fiscal appears to be low. The sharp drop in oil prices, subdued food inflation and strengthening of the rupee mean lesser risk to the inflation trajectory. Given the downtrend in domestic GDP growth, a policy rate hike may just have to wait,” Dharmakirti Joshi, chief economist at CRISIL Research, said.

India Ratings and Research Principal Economist Sunil Sinha said it does not expect a rate hike in the near term if the current growth-inflation mix sustains.

Naresh Takkar, MD and Group CEO, ICRA Ltd said RBI may change its stance to neutral in the next policy review to be held from February 5-7 next year.

Given the downside risks to economic growth, some more MPC members could tilt towards a change in stance by the next meeting in February, Abheek Barua, Chief Economist at HDFC Bank, said.

“Despite the cut in inflation forecasts, the central bank reasoned that the 12-month profile points to a return above the 4 per cent target prompted them to stick with the ‘calibrated tightening’ stance. Despite markets’ interpreting Governor Patel’s post-policy comments as dovish, we don’t concur. In our view, policy rates are on course for a prolonged pause,” Radhika Rao, economist at DBS Bank, said.