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MOSL: ECOSCOPE: RBI should maintain neutral stance for now; Neither domestic nor global fundamentals support

ECOSCOPE: RBI should maintain neutral stance for now; Neither domestic nor global fundamentals support monetary tightening

 

In stark contrast to April 2018, a hike in repo rate as soon as August 2018 has become almost a unanimous call, with the Reserve Bank of India (RBI) expected to change its stance from neutral to hawkish this week. We, however, believe that the Bank should maintain its neutral policy this week for at least five reasons:

1. Notwithstanding a spurt in crude oil prices, the average inflation forecast (private and RBI's) is sub-5% for FY19 and FY20, with 4-4.5% in 4QFY19. If the upside risks have not yet altered inflation forecasts significantly, how can they alter the monetary policy stance?
2. Central banks across the developed world have turned more cautious in the past couple of months, with growth weakening in the Eurozone, the United Kingdom (UK), Japan and China. The US Federal Reserve has also toned down its stance. What is more relevant - cautious developed central banks or hawkish EM central banks?
3. With fiscal policy reaching limits in its ability to support economic activity, the monetary policy should avoid any tightening for now. Although India's GDP growth in 2HFY18 improved, it was influenced by favorable base, which will start fading from FY19.
4. The recent weakness in the Indian Rupee (INR), like other emerging market currencies, is a by-product of stronger US Dollar (USD). Although INR has weakened ~5% in nominal terms in 2018, the current level is similar to the average in 2016 and INR against USD is still stronger in real terms.
5. Higher (or double-digit) growth in minimum support prices (MSPs) is still a valid fear, but not a certainty. It would be rational to wait and watch for the final MSP policy before acting on the risks.