The meeting of the RBI Monetary Policy Committee (MPC) on the 04th of April is likely to be one of the most keenly awaited monetary policies. The RBI had obliged the money markets by cutting rates by 25 bps in its February policy. Will the RBI oblige the markets with another rate cut or will it prefer to wait. Let us look at the macros first!
Inflation and IIP growth
The recent data coming out from MOSPI has shown a clear uptick in inflation. In fact CPI inflation was up at 2.57% and the WPI inflation was up at 2.93%; both above market estimates. The question is whether the rates could go higher. There are two things to watch. Firstly, food inflation is sharply up. That is partly base effect and partly the impact of higher MSP. That means, the food inflation could trend higher in the months to come. Secondly, the core inflation remains elevated at 5.3% and that shows no signs of abating. While the RBI may talk about headline inflation, it is core inflation that actually influences the cost push inflation in the economy. While 4% is still some distance away, the RBI could have room for worry. Then we come to growth. IIP has lagged at 1.7% and the pressure is coming from manufacturing. That is surely a case for a rate cut as low growth typically requires a benign rate regime. The RBI will have to address the dilemma of higher inflation and lower growth to decide on rates!
Global cues will matter too
There are a lot of global cues that will matter. The US-China trade pact is nowhere near fruition and a desperate China may be inclined to weaken the Yuan. That will weaken the rupee. Also any signs of hawkishness by the US Fed in its next two meetings could have real ramifications for Indian monetary policy. Then there is price of oil which remains the X-factor. The OPEC appears to be hell bent on curtailing supply for much longer and the sanctions on Venezuela and Iran are only adding to the pressure on oil prices. Oil has an immediate impact on the CPI inflation and also weakens the rupee. Lower rates may not be conducive in such a scenario.
RBI may actually pause
The RBI may actually be inclined to pause in April and observe the inflation data for a couple of more months. Elections are naturally inflationary and the focus may be more on adequate liquidity than on rates. In February, the rate cuts were not transmitted due to the complex cost of funds structures of banks. That was disappointing and is unlikely to spur growth. The launch of dollar swaps of $5 billion on March 26th could be the first of many. The signal is that in April the RBI and government will focus more on adequate liquidity than on dovish rates. That would make more sense with a new economic policy. For April, it may a halt on rate cuts! ©