CREDIT POLICY – OUTLOOK CAUTIOUS AND STANCE NEUTRAL

By Ruma Dubey

April’s headline inflation had surpassed the 4% target of RBI. Monsoon has arrived on time. GDP for Q4FY18 was robust unlike expectations.

Thus with no worry on growth, the BIG question was whether RBI will do what it is supposed to do – keep an eye on inflation, which is rising. Proving a majority of analysts wrong, the RBI hiked rates by a 25 bps, the first time in four years.

Another point where analysts were proven wrong was their expectation of RBI adopting a hawkish stance. Instead RBI took on a neutral stance, sending the message across that this was the rate hike in June and there is no indication that this rate hike cycle will continue. RBI also hiked the inflation target by another 20 bps but retained GDP target for FY19 at 7.4%.

The RBI, explaining the rate hike reason, stated, “A major upside risk to the baseline inflation path in the April resolution has materialised, viz., 12 per cent increase in the price of Indian crude basket, which was sharper, earlier than expected and seems to be durable. Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook – both on the upside and the downside. Several other risks remain. First, global financial market developments have emerged as another important source of uncertainty. Second, the significant rise in households’ inflation expectations as gathered in the May 2018 round of the Reserve Bank’s survey could feed into wages and input costs in the coming months. However, the pass-through to output prices remains muted presently. Third, the staggered impact of HRA revisions by various state governments may push headline inflation up. While the statistical impact of HRA revisions will be looked through, there is a need to watch out for any second round impact on inflation. Fourth, the impact of the revision in the MSP formula for kharif crops is not possible to assess at this stage in the absence of adequate details. Fifth, as forecast by the IMD, if the monsoon is normal and well-distributed temporally and spatially, it may help keep food inflation benign.”

Naturally, the markets were expecting a status quo so when this rate hike came in, the indices tanked by some 100 points but remained in the green; it was a direct fall into the red. This means that the market is not happy with the rate hike but the neutral stance kept the worries at bay.

The highlights of the RBI Policy:

• Increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.25 per cent.
• Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.
• The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
• The projected CPI inflation for 2018-19 is revised to 4.8-4.9 per cent in H1 and 4.7 per cent in H2, including the HRA impact for central government employees, with risks tilted to the upside. Excluding the impact of HRA revisions, CPI inflation is projected at 4.6 per cent in H1 and 4.7 per cent in H2.
• GDP growth for 2018-19 is retained at 7.4 per cent as in the April policy. GDP growth is projected in the range of 7.5-7.6 per cent in H1 and 7.3-7.4 per cent in H2.
• All six members voted for a rate hike – no voice of dissent this time.
• The next meeting of the MPC is scheduled on July 31 and August 1, 2018.