RBI Policy: D-Street largely expects status quo in benchmark rate, but some hope for a cut

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will release their sixth Bi-monthly Monetary Policy Statement for 2019-20 on February 6 and the central bank is expected to maintain status quo on the rates, analysts and brokerages said.

Even as the concerns over a lingering weakness in the economy persist, rising inflation is the biggest factor that may keep the central bank away from tweaking key lending rates.

In December, the retail inflation peaked to a five-year high of 7.3 percent, mainly on account of costlier vegetables, specifically onion and tomato.

In its previous monetary policy review in December, RBI had decided for a status quo, leaving the repo unchanged at 5.15 percent on concerns of rising inflation.

As the government, in Budget, has projected the fiscal deficit to widen to 3.8 percent of the GDP against the earlier estimate of 3.3 percent, the government will feel compelled to borrow more from the market which will result in hardening of interest rate and put pressure on inflation.

Is a rate cut possible?

Most brokerages and analysts say a rate cut is unlikely.

Shanti Ekambaram, President – Consumer Banking at Kotak Mahindra Bank is of the view that the RBI is likely to maintain status quo on rates as well as its monetary policy stance. They are likely to continue an accommodative stance to support growth.

According to a Reuters poll, economists expect the MPC to keep the repo rate steady at the current 5.15 percent until October and the MPC may lower the repo rate to 4.90 percent in the October-December quarter.

“Given the supply-driven nature of the price spurt and likelihood of a gradual pullback over the next two quarters, we expect the RBI to retain an accommodative stance while keeping rates on hold,” Radhika Rao, an economist with DBS Bank, told Reuters.

Similarly, brokerage firm Elara Capital expects MPC to stay on hold through CY20. If the inflation trajectory means reverts to 4 percent in Q4FY21E, there is a slight possibility of a rate cut, Elara said.

"We expect CPI inflation to average 5 percent in FY21E against 4.9 percent in FY20E amid higher food prices. CPI inflation is expected to remain in the range of 7-8 percent over January-March 2020E and nearly 6 percent until June-July 2020E. The inflation prints above the upper end of the inflation target set by RBI diminishes the scope of rate cuts," said Elara.

Elevated inflation remains a concern for the central bank and there are fewer chances that it will ease rapidly as the prices of vegetables have still not fallen to the expected lines and the full impact of the telecom tariff is yet to play out.

Brokerage firm Kotak Securities expects CPI inflation to trend towards 6.2 percent by March 2020 and said even though we acknowledge that the output gap remains negative and that any growth recovery is likely to be slow and prolonged, the MPC is expected to remain concerned about the significantly high CPI inflation.

"MPC will remain on an extended pause but there is an increased probability of a shift in policy stance. While food prices may soften from January onwards owing to the arrival of the Kharif produce and robust Rabi sowing, we believe that the moderation will be gradual as the food inflation has become more generalised," said Kotak.

The outside chance

Some brokerages and analysts are still assessing the scope for a rate cut amid slowing GDP growth and rising inflation.

Brokerage firm Edelweiss Securities points out that in recent weeks, deflation has set at vegetable prices. Also, crude oil prices have dipped 12 percent since the previous policy. To that extent, inflation readings have peaked out.

The brokerage feels there is an outside chance of a rate cut as concerns over growth have persisted while fresh uncertainties have cropped up amidst the outbreak of Coronavirus in China. This could weigh on global demand in the near-term and, in turn, on India’s exports.

Besides, in the recently presented Union Budget, the government has abstained from going for a big fiscal push so all this should be comforting to monetary authorities, Edelweiss said.

"Amid improving inflation prospects, government maintaining fiscal prudence and lingering weakness in the economic activity, we perceive an outside chance of the RBI taking a proactive rate cut in the February policy review. Even if not, we maintain that rate easing will resume in FY21. We expect 50-75bps cut in repo rate in 2020," said Edelweiss Securities.

Besides, a PTI reported quoted financial firm Goldman Sachs saying that the central bank will shift the stance of the monetary policy to "neutral" from "accommodative" in its February review and there is a possibility of rates hikes as well in 2020.