The MPC minutes announced by the RBI on 20th February showed consensus among the 6 members about the need to go slow on rate cuts. MPC has shown a clear preference for inflation control over boosting GDP growth.
Inflation is the worry
All the six members of the MPC were almost unanimous that sharply higher inflation was the real problem for the Indian economy. At 7.59% in Jan-20, CPI inflation leaves little room for any further rate cuts. Household inflation expectations are also tilting towards the higher side. Food inflation has always been sticky and the virus scare in China could only make oil prices more volatile. Inflation is already 150 basis points off the upper range allowed by the RBI and the MPC looks unlikely to cut rates till the time inflation moves below 4%.
Inflation is also giving hope
The minutes of the MPC are explicit that most members expect a medium-term moderation in inflation. Food prices have been the big driver of inflation and that could benefit from a bumper food grain output this year. Despite a weak Kharif output, the unseasonal rains helped the Rabi output to be better than the expectations. India is expected to close fiscal 2019-20 with a foodgrain output of 292 million tons. That will help to temper food inflation. Of course, the cost-push impact on core inflation is a worry.
Growth becomes secondary
It is not that the MPC has given up on boosting economic growth. They have appreciated the limitations of monetary policy as an instrument of boosting growth. For example, the unanimous view appears to be that it would be better to wait out the impact of fiscal measures like company tax cuts, budget sops for lower-income groups and the big infrastructure spending splash that is planned. The NCAER has pegged growth for fiscal 2019-20 at 4.9% and for 2020-21 at 5.6%. Clearly, the recent China virus syndrome has only made the policymakers more pessimistic and they see limited traction on growth when the global GDP growth is slowing. For now, it will only be a fiscal formula for growth.
What about rate outlook?
It would take some doing for inflation to come down by 300 bps or more before the MPC would be willing to look at further rate cuts. That almost rules out rate cuts for two more policies in April and June. A good Rabi followed by a good Kharif this year could bring some genuine respite for inflation. Unless the CPI inflation goes up much further from here, the MPC is unlikely to change its stance from “accommodative”. The real trigger will have to come from global markets and a revival in global growth. For the time being, growth will remain the secondary focus for the MPC, with inflation being the primary challenge!