Unequivocally two different pictures emerged from the analysis of current policy and performance review in comparison to October’s performance, by the Monetary Policy Committee in December.
Subsequent to the fall in crude oil prices by 20 percent and upsurge in the rupee by 5 percent, upside risks to inflation have, for now, turned to downside risks. No surprise then that most economists are predicting a status quo on rates.
48 of the 52 economists polled, believe that the MPC will continue to maintain a status quo on the repo rate. After 50 basis points in repo rate hikes so far this financial year, the benchmark rate now stands at 6.5 percent.
Beyond the near-term decision of keeping rates on hold, the MPC will need to do some soul-searching on its inflation forecasting abilities. Retail inflation has remained below forecasts for the last five months and is currently under the mid-point of the inflation target of 4 (+/- 2) percent.
To be sure, the MPC does not need to respond to monthly prints and is looking to bring inflation down to 4 percent in a durable manner. However, the trajectory of low food prices gives them enough reason to debate whether inflation will end the year lower than the projection of 3.9-4.5 percent.
Saugata Bhattacharya, chief economist at Axis Bank expects inflation to end the year just above 4 percent and sees a probability of the MPC moving back to a ‘neutral’ stance. Prachi Mishra, chief India economist at Goldman Sachs, argues to the contrary and expects the base effect on inflation to wear out. She expects rate hikes to resume in 2019.
At the October policy review, the committee had highlighted the upside risks to inflation emerging from oil prices. “Oil prices remain vulnerable to further upside pressures, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate,” the committee had noted in its resolution.
“The combination of the close to 25 percent fall in oil prices since the last policy meeting, the 5 percent appreciation of the rupee versus the U.S. dollar over the same time, and the absence of any MSP-related food inflation, suggests that inflation will remain low for longer,” wrote Pranjul Bhandari, chief India economist at HSBC India. Bhandari sees no change in rates in December but expects one rate hike in 2019.
At 7.1 percent, GDP growth came in lower than expectations for the second quarter of the current fiscal year. The recently released second quarter GDP data showed some signs of a fall in consumption growth, possibly due to rural distress and heightened crude oil prices.