The “no action’ policy with a “neutral stance” was actually the RBI soothing frayed market nerves
The status quo in rates from the Reserve Bank of India was hardly a surprise, but the dovish stance on inflation and the optimistic outlook on growth were enough to banish fears of a rate increase for the medium term. For banks, bashed around by recognition of higher non-performing assets (NPAs) and the requirement to maintain elevated provisions, the possible gains on the bond book will come as a respite. The postponement of adoption of Ind As (Indian accounting standard) to FY20 too should bring some relief. And for the non-banking finance companies (NBFCs), at an advantage to banks now, the decline in funding costs will be a nice bonus.
The “no action’ policy with a “neutral stance” was actually the RBI soothing frayed market nerves.
Dovish outlook on inflation
The decline in the retail inflation to 4.4% in Feb 18 (4.1% excluding the house rent allowance impact) was driven largely by lower food inflation. It was comforting to see RBI revising down its inflation expectations in the near as well as in the medium term.
For Q4 FY18, the inflation forecast stands revised down to 4.5% from 5.1%. For the first half of FY19, RBI expects retail inflation to remain in the range of 4.7-5.1% contrary to its previous forecast of 5.1-5.6%. For the second half of FY19, the inflation expectation has now been brought down to 4.4% from 4.5-4.6%.
Bullish on growth
The RBI is also upbeat on growth, alluding as it did to several data points that gave early positive signals of a gradual comeback. Strong consumption indicators like growth in domestic air passenger traffic, foreign tourist arrivals, rising sales of passenger vehicles and a strong upturn in the production of consumer durables are cases in point. The growth in sales of two-wheelers and tractors reflects buoyant rural consumption. Capital goods production registered a 19-month high growth in January, indicative of the likely traction in investment demand. Commercial vehicles sales remain strong. Assessment of overall business sentiment for manufacturing also improved in Q4 FY18 as reflected in the Reserve Bank’s Industrial Outlook Survey. The services PMI moved out of contraction and stabilised in March on a renewed increase in new business and strengthening expectations.
Thus overall GDP growth is expected to make a rebound from 6.6 per cent in FY 18 to 7.4 per cent in FY19. While the overall GDP growth number stays unchanged at 7.4% for FY19 (same as the previous policy), growth is expected to be back ended, with RBI projecting higher growth in the second half of the fiscal compared to the first half.
Then why not nudge the policy stance?
While the fine print suggests a dovish outlook, RBI refrained from changing the policy stance from neutral on account of the several imponderables that might rear their heads: An uneven distribution of monsoon, inflationary impact of Minimum Support Price (MSP) hike, fiscal slippage that might show up in the second half, including slippages from state budgets, volatility in crude prices, and impact of HRA (house rent allowance revision) in the states. So the bank stuck to its official stance that future action would be driven by data.
In other significant developments RBI has now officially banned all virtual currencies (VCs) in view of their risks and entities regulated by RBI have been barred from providing services to any individual or business entities dealing with or settling VCs.
In sum, the outlook on inflation and growth provides a much needed sentimental relief to the market and would provide financial relief to banks as yields head south. This could partially counter the pain emanating out of elevated provisions on account of NPA and NCLT (national company law tribunal) resolutions. The policy spells a bonanza for the NBFCs as their competitive position only strengthens with lower funding costs. Finally, for the government, a dovish inflation outlook creates headroom for some dole-outs in an election year without worrying too much about its resultant impact.
