The Reserve Bank of India will announce its first bi-monthly monetary policy in 2019 on Thursday. It will be the first for new Governor Shaktikanta Das, and the first monetary policy committee meeting since Urjit Patel abruptly resigned in December 2018.
Patel was credited for ushering in the new inflation targeting monetary policy framework at the central bank. The RBI has long maintained a consumer price index (CPI) or retail inflation target of 4 per cent, plus or minus 2 percent.
According to latest available data, CPI inflation touched a 18-month low of 2.19 per cent, versus 2.33 per cent in the previous month. The wholesale price inflation in December hit a eight-month low of 3.8 per cent.
If broader inflation is considered, then the RBI would ideally be in a position to lower its benchmark repo rate on Thursday. A slowdown in economic growth is another reason critics would bat for a interest rate cut.
However, decelerating headline inflation is one side of the story. Much of the fall in CPI inflation can be attributed to a fall in food prices.
But, exclude food prices and data shows that core inflation remains elevated at 5.7 per cent. RBI would also be watchful of that.
In the interim budget announced last week, fiscal deficit target was missed and there were also sops in the form of guaranteed income support announced for marginal farmers and tax rebates for people with income up to Rs 5 lakh, which could give consumption a boost.
The central bank will also be watchful of the fiscal slippage, which can have a bearing on inflation.
Therefore, some economists feel that while RBI will reverse its hawkish policy stance to neutral, it may not actually lower repo rate this time around.
"We expect the MPC (monetary policy committee) to be cautious on the inflationary impact of the budget even as fiscal slippage seems manageable," said Suvodeep Rakshit, senior economist, Kotak Institutional Equities.
Rakshit feels the central bank may reduce repo rate by 0.25 per cent in April and June, but stay put this time around by only changing its stance to neutral.
Madan Sabnavis, chief economist at CARE Ratings also doesn't expect RBI to reduce interest rates now. "RBI will adopt a wait and watch policy and will maintain a status quo in the rates owing to expectations of build up in inflation in the coming months," he said.
A possible upward movement in crude oil prices, increase in general spending with general elections around the corner, higher food prices with minimum support prices likely being made more effective in the rabi season are among the factors RBI will watch, said Sabnavis.
Deepak Jasani, head of retail research at HDFC Securities also feels a rate cut right now would be premature, even though there may be reasons meriting a rate cut.
"Consistently benign inflation (though core remains high), headwinds to economic growth and nearness to elections at the time of next meet in April are the main reasons why a rate cut can even be considered now. On the other hand, an expansionary budget may be viewed as having inflationary lag impact, thus negating the need to cut rates at this point," he noted.
Sonal Varma, chief India economist at Nomura Securities also feels that while MPC will change its stance from 'calibrated tightening' to 'neutral,' it may not cut rates in the backdrop of the budget.
"We expect the RBI to view the budget as inflationary and flag this as an upside risk to inflation. The expansionary fiscal impulse, at the margin, negates the need for the RBI to consider monetary easing at this stage," said Varma.
