The fourth bi-monthly monetary policy review for FY 2019-20 saw the Reserve Bank of India (RBI) reducing the repo rate by 25 basis points from 5.40 percent to 5.15 percent, while continuing the existing 'accommodative' monetary policy stance. These decisions are in line with the medium-term target of 4 percent consumer price inflation (CPI), within a band of +/- 2 percent, while supporting growth. This policy meet saw all 6 members of the monetary policy committee (MPC) unanimously deciding to reduce the policy rate and continuing the existing monetary policy stance.
RBI's Views on Inflation and Growth
In the August 2019 policy review, the CPI inflation was projected at 3.1 percent for Q2:2019-20, 3.5-3.7 percent for H2:2019-20, and 3.6 percent for Q1:2020-21, with risks evenly balanced. The actual inflation outcome in Q2 (July – August) at 3.2 per cent was broadly in alignment with the August policy projections.
The Central Bank has put forth the following factors that will guide inflation during 2019-20:
•The Kharif production is estimated at close to last year's level, auguring well for the overall food supply situation.
• The vegetable prices may remain high in the immediate months but are likely to moderate as winter supplies enter the market. Prices of pulses are expected to remain stable due to adequate buffer stocks.
• The forward looking surveys held by RBI point to weak demand conditions persisting, with indications of softening of output prices in Q3:2019-20; price pressures in CPI excluding food and fuel are likely to be muted.
• The crude oil prices would remain volatile in the near term; although global demand is slowing down, the continuing geo-political uncertainties pose some upside risks to the inflation outlook.
• The three-month and one-year ahead inflation expectations of households polled by the RBI have risen in the current round, reflecting near term price pressures.
• The financial markets remain volatile with currencies of several emerging market economies trading with a depreciating bias in the recent period.
Taking into consideration these factors and the impact of recent policy rate cuts, the path of CPI inflation is revised to 3.4 percent for Q2:2019-20, projections are retained at 3.5-3.7 percent for H2:2019-20 and 3.6 percent for Q1:2020-21, with risks evenly balanced.
In the August policy review, GDP growth for 2019-20 was projected at 6.9 percent – in the range of 5.8-6.6 percent for H1:2019-20 and 7.3-7.5 percent for H2, with risks somewhat tilted to the downside; GDP growth for Q1:2020-21 was projected at 7.4 percent. Insights from the GDP growth figures for Q1:2019-20 are as follows:
• The various high frequency indicators suggest that domestic demand conditions have remained weak.
• The business expectations index of the RBI's industrial outlook survey shows subdued expansion in demand conditions in Q3.
• Export prospects have been affected by slowing global growth and continuing trade tensions.
• Positive impact of monetary policy easing since February 2019 is expected to gradually feed into the real economy and boost demand. The numerous measures implemented by the Government over the last two months are expected to revive sentiment and spur domestic demand, especially private consumption.
Taking these factors into consideration, the GDP growth for 2019-20 is revised downwards from 6.9 percent in the August policy to 6.1–5.3 percent in Q2:2019-20, and in the range of 6.6-7.2 percent for H2:2019-20, with risks evenly balanced. GDP growth for Q1:2020-21 is also revised downwards to 7.2 percent.
The MPC is cautious about the current weak growth and will take appropriate measures to improve this indicator as can be seen from its concluding remarks:
The MPC notes that the negative output gap has widened further. While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum. With inflation expected to remain below target in the remaining period of 2019-20 and Q1:2020-21, there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate. It is in this context that the MPC decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
The policy document gives a clear indication that the Central Bank and Government are on the same page and are taking measures to help spur growth. Decision to continue the monetary policy stance clearly indicates there is room for further rate cuts as long as inflation remains within the specified limit, and that the MPC would use this space to revive growth momentum.
As for our investors, we continue to be positive on short term funds.
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