India Monetary Policy December 2018

India: RBI keeps rates unchanged in December amid slowing inflation

At its monetary policy meeting on 3–5 December, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) voted unanimously to keep interest rates unchanged. The repo rate therefore remained at 6.50%, the marginal standing facility (Bank Rate) at 6.75% and the reverse repurchase rate at 6.25%. In addition to the interest rate decision, the MPC also reiterated its “calibrated tightening” monetary policy stance, meaning it does not plan imminent cuts to rates. December’s outturn came on the back of moderating inflation and after interest rates were hiked in both June and August to keep a lid on prices.

At its December meeting, the MPC noted that economic activity appears to be slowing among the world’s advanced economies and emerging-market economies alike. Zooming in on India itself, the MPC noted that economic growth has been meager recently, with the economy expanding at 7.1% in Q2 FY 2018 compared to 8.2% in Q1 FY 2018. In terms of prices, India has experienced a moderation in inflation in recent months, with headline inflation at 3.3% in October, down from 3.7% in September. Looking ahead, the MPC maintained its H2 FY 2018 forecast of 7.4% GDP growth in December, but substantially revised down its inflation forecasts for the period to a range of 2.7% to 3.2% compared to the previous range of 3.9% to 4.5%.

On what this latest outturn means going forward, and picking up on a noteworthy comment made by the governor of the Central Bank at December’s meeting, analysts from Nomura said:

“We were surprised with the MPC’s decision to change its stance from ‘neutral’ to ‘calibrated tightening’ in October and remain (somewhat) surprised with the continuation of this stance in December. However, we think the RBI governor’s comments that if upside inflation risks do not materialize, there is a “possibility of space opening up for commensurate action” acknowledges a possible change in stance (back to neutral) and a reversal in policy rates. We do not expect upside risks to materialize and expect lower inflation and the weaker growth outturn to result in a change in policy stance back to ‘neutral’ in early 2019, either in February or at the April policy review. We think the continued undershoot in food price inflation, a likely growth slowdown (which will lower core inflation) and a sharp correction in oil prices – all point to the future policy path leading towards dovishness and possibly easing, rather than the unidirectional hike that the current ‘calibrated tightening’ stance suggests.”

The next monetary policy meeting is scheduled for 5–7 February.

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