In its Fourth Bi-Monthly Monetary Policy Review 2017-18 held yesterday, the RBI decided to maintain status quo on the policy rates. The Central Bank also maintained a neutral stance on the monetary policy while sounding hawkish about the future risks to inflation and growth prospects of the economy.
Let's look at the expectations for the main indicators of the economy:
Inflation is expected to move up and is estimated to be in the range of 4.2 to 4.6 percent in the second half of FY18.
- Food prices going forward are expected to remain stable; however the advance estimates of Kharif production pose uncertainties. Prices of pulses which had declined significantly in recent months have now begun to stabilize.
- Some price revisions pending the Goods and Services Tax (GST) implementation have been taking place.
- There has been a broad based increase in CPI inflation excluding food and fuel
- International crude prices which have been rising since July have firmed up further in the month of September.
Upside risks to baseline inflation
- The implementation of farm loan waivers by state governments may result in possible fiscal slippages and undermine the quality of public spending.
- States' implementation of the salary and allowances award has not been factored into the baseline projection.
GDP and GVA
The projection of real GVA growth for 2017-18 has been revised down to 6.7 percent from the August 2017 projection of 7.3 percent.
- Slowdown of GDP growth in Q1 FY18 and first advance estimates of Kharif foodgrains production are early setbacks.
- The implementation of GST has led to short term uncertainties for the manufacturing sector. This may further delay the revival of investments, which are already impacted by the stressed balance sheets of banks and corporates.
- Consumer confidence and manufacturing and services sectors weakened in Q2 FY18, as revealed in an overall business assessment of the two sectors by the Reserve Bank. On the positive side; firms are expecting a significant improvement in business sentiment in Q3 of FY18.
The MPC has decided to keep the policy stance neutral based on the following:
- CPI has risen by 2 percent since the monetary policy review held in August.
- Geo-political tensions; heightened volatility in financial markets due to the US Fed's plan to unwind its balance sheet; and the risk of normalisation by the European Central Bank.
- Although the domestic food price outlook remains stable, momentum is building in prices of items excluding food, especially from rising oil prices.
- Possibility of fiscal slippages is a cause for concern.
RBI continues to have serious concerns about the stagnating investment activity in the economy. Its statement was:
"The MPC reiterated that it is imperative to reinvigorate investment activity which, in turn, would revive the demand for bank credit by industry as existing capacities get utilised and the requirements of new capacity open up to be financed. Recapitalising public sector banks adequately will ensure that credit flows to the productive sectors are not impeded and growth impulses not restrained. In addition, the following measures could be undertaken to support growth and achieve a faster closure of the output gap: a concerted drive to close the severe infrastructure gap; restarting stalled investment projects, particularly in the public sector; enhancing ease of doing business, including by further simplification of the GST; and ensuring faster rollout of the affordable housing program with time-bound single-window clearances and rationalisation of excessively high stamp duties by states."
We find the tone of this review very similar to the last policy meet held in August. The concerns on inflation and growth mentioned give us the feeling that team Patel will not be in a hurry to cut the policy rates even in the coming months. Hence, we maintain status quo on our recommendations.