Will the RBI cut rates again?
A decelerating economy in the midst of elections can create problems for the incumbent political partyUpdated: Apr 02, 2019 20:35 IST
On Thursday, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which started its bimonthly meeting yesterday, will announce its decision on the policy rate. The MPC had announced a 25 basis points cut in the policy rate in its February meeting. The meeting is happening at a time when the Indian economy has been losing its growth momentum. The growth of eight core industries for February 2019 was reported to be 2.1%, which is 2.3 percentage points less than the value of February 2018. Growth of Gross Value Added (GVA) growth has been falling for three consecutive quarters beginning June 2018. Capital expenditure data from the Centre for Monitoring Indian Economy for the quarter ending March 2019 shows that the investment scenario continues to be subdued in the economy. The policy rate announcement also comes just before the start of the 2019 elections, with the first phase scheduled for April 11. A decelerating economy in the midst of elections can create problems for the incumbent political party.
A Reuters poll of economists expects that the MPC will once again reduce the rate on Thursday. Some of the economists who have participated in the poll are sceptical about the ability of a rate cut to provide a stimulus to the economy in the short run. There are also the usual concerns about core inflation — the non-fuel, non-food component of benchmark inflation measure — being at much higher levels than the headline Consumer Price Index (CPI) numbers. What is also alarming is that nearly half of the economists (who answered an additional question) in the Reuters poll, have expressed a lack of confidence about the accuracy of official Indian economic data releases.
In addition to a decision on the policy rate, it will also be interesting to watch the MPC’s forecast about inflation in the next few months. This is especially important for food inflation, which is finally showing some signs of growth after a prolonged slump. Low food price inflation has been an important reason for widespread agrarian distress in the country. While a slow revival in food prices could help the government in quelling some of the rural anger, any sharp increase also carries the risk of anger among the non-farm-dependent population. Also worth watching out for would be the figures from the RBI’s Consumer Confidence Index, which could give us a sense of the political mood in some of India’s big cities.