India Rate Decision Guide: Learning to Read the Monetary Panelby
22 of 39 economists surveyed predict no change; 17 see a cut
Investors seek clues on intermediate CPI target, real rates
It’s a new era at the Reserve Bank of India, where the monetary policy decision is about to be made collectively for the first time. With no history to rely on, economists are split on the outcome.
Consumer-price gains slowed to 5.05 percent in August after briefly breaching the upper range of the inflation target, as good monsoon rains pushed down food costs. That’s enough to warrant a cut in the benchmark repurchase rate to 6.25 percent from 6.5 percent, according to 16 of 39 economists in a Bloomberg survey, while one predicts a reduction to 6 percent and 22 see no change.
“The RBI will have to take a wholistic view of inflation direction rather than reacting to one fall in inflation,” Indranil Pan, chief economist at IDFC Bank Ltd. in Mumbai, wrote in an e-mail. “Not an easy choice for the MPC and hence they would likely err on the side of caution and not cut immediately.”
Governor Urjit Patel, who last month replaced Raghuram Rajan, is joined by two Reserve Bank officials and three academics on the panel meeting Monday and Tuesday. Here’s what to look for in the policy statement, which is scheduled for release at 2:30 p.m. in Mumbai and will be followed by a press conference 15 minutes later.
New Group, New Goals?
While the committee is bound by an inflation target of 4 percent plus or minus 2 percentage points, it needs to clarify whether it embraces two legacies of the Rajan era: an interim goal of 5 percent for March 2017 and a pledge to keep real interest rates within 1.5-2 percent to reward savers. Both will have a direct impact on future rate decisions.
Investors will also look for clues on vibrancy and openness in the discussions of the MPC, in particular whether the three RBI members voted as a block. While the minutes and the rationale for each vote will probably only be published later this month, Patel may indicate the balance of opinions during the press conference.
Patel will also have a chance to confirm a March 2017 deadline for banks to clean their books of as much as $120 billion in stressed assets.
The central bank will release its bi-annual assessment of Asia’s third-largest economy, including new inflation forecasts. HSBC Holdings Plc economist Pranjul Bhandari expects price pressures to ease to as low as 4.5 percent in January-March and stay below 5 percent for the next 12 months, helped by a slowdown in food costs.
However, uncertainties are brewing given that oil-producing countries may cut output and push up prices, Jay Shankar and Rahul Agrawal of Religare Securities Ltd. wrote on Sept. 30. A potential increase in housing allowance for public servants and an upcoming goods and services tax will also push inflation higher, they said.
If Not Now, Then When?
Economists are trying to assess the ideal timing for a rate reduction, amid weak investment and slowing consumption.
Since the RBI has started repaying some $20 billion of foreign-currency swaps taken in 2013, it should wait for more clarity on total outflows before cutting, according to Religare. Deutsche Bank AG’s Kaushik Das and Taimur Baig however say that Tuesday offers the RBI “a sweet spot to cut," given that the U.S. isn’t seen raising rates before December.
“For monetary transmission to be effective, at least 50 basis points of rate cuts are needed in a short period of time,” Das and Baig said, predicting this will be split equally at the October and December reviews. “We think RBI will also prefer to front load the rate cuts, given the current growth-inflation dynamic.”