By Ruma Dubey

The market has really not got no major trigger in sight and that’s why the Credit Policy of tomorrow holds such a tight grip on the sentiments. Every eye on Dalal Street is now trained on Urjit Patel – will he once again sacrifice growth for inflation?

95% of analysts feel that the RBI will maintain a status quo on the interest rates – there will be no change. But what could be more pertinent note is the stance of the RBI - hawkish or dovish.

Every time the policy comes around, be it in India or USA, these two words are thrown around and many of us are left wondering - these two, hawks and doves are birds, right? How do they show the stance of the policy ahead?

For most of us ignoramus kinds, for the records, dovish means the RBI is willing to be accommodative and eyes are trained on growth and would take steps to stimulate growth. On the other hand, hawkish means the Governor is looking at tightening the rates as RBI feels that the economy needs to be cooled and biggest reason of all – inflation remains the main and only target; thus with an eye on inflation, the stance is very focused on only controlling the prices.

For the past few times, the RBI has remained staunchly hawkish. But maybe the time has come to adopt a dovish tone. The slowdown in Q4FY17 GDP growth rate at 6.1% and FY17 at 7.1% is a major cause for concern – we can blame it all on the demonetization. The growth would have slipped further had it not been for the over 20% growth recorded in Govt expenditure and surge in iron ore production in FY17. As against this, despite banks being flush with liquidity, private capital formation – as a ratio of gross capital formation to GDP, was down to a new low of 25.5% in Q4FY17.  And this factor alone should force the RBI to change its outlook from inflation to growth – from hawkish to dovish.

The stance during its previous policy on 6th April was hawkish and it had sat tight on the interest rates. This time, we need to see if that tone changes to dovish. And while talking about the previous policy, if one goes by the various “threats” which RBI had pointed out last time, we actually should get a 50 bps rate cut!

First stance was on inflation – the YoY CPI has come down from 5.76% to 2.99% in May. And the next CPI is also expected to remain in this sub-3% range, way below the MPC’s target of 4%.

The second worry was on implementation of GST – well, that it going to happen; no uncertainty there on the dates and the immediate impact will be on purchases and services till people become well versed with the rates and many grey areas get cleared. Thus many expect inflation to remain low going ahead too.

The third worry was on rupee rates vis-à-vis the US dollar. The rupee has been holding its steed with no serious depreciation. In fact when RBI announced its policy on the 6th, rupee was at 66.53 and today it is at Rs.66.35. So there has been an appreciation and unless something untoward happens, it is expected to remain range bound at current levels. Yes, the RBI will talk about US FOMC decision and most expect a rate hike; that could have an immediate impact on the rupee.  

Crude oil price is no longer a worry as such because it is expected to remain at the current levels- it has in fact come down from around Rs.55/barrel in April to around Rs.49 today.

Monsoon was also a big worry and the IMD has laid this worry to also rest – rains are expected to be normal.

All in all, the writing on the wall actually points towards a more dovish policy. A rate cut at this juncture would do wonders to the stock market sentiments but do not think that people will rush to buy cars and homes immediately. Rate cut alone cannot give impetus to growth. Private consumption has to go up and once macro factors, supply impediments, GST; all this gets cleared, only then will we see growth picking up.

There is excessive focus on repo rates and this seems misplaced at the moment as even a 50 bps rate cut would be more about sentiments but the real change will happen only when projects take off. The economy will take its own course and softening of interest rate is a given but the Govt needs to work overtime to push growth.