RBI policy today: More than rate cut, read Urjit Patel’s lips on GDP growth comments

Majority of the economists polled by Reuters expect the monetary policy committee (MPC) to move in favour of a quarter percentage point (25 basis point) rate cut in the Reserve Bank of India’s (RBI) key rates at its sixth bi-monthly monetary policy slated to be released later in the day (Wednesday).

The main trigger, the poll said, would be a visible drop in the retail inflation in the recent months. Easing inflation has certainly given more room for the MPC, which opted for a status-quo in the last round, to effect a rate cut this time. The CPI (consumer price index) inflation fell to 3.41 percent in December, well below the 5 percent target by March.

Besides the falling inflation, a weak economic scenario post demonetisation too mounts the pressure on the MPC to take a growth-supportive stance to stimulate individual and corporate loan demand.

Also, finance minister Arun Jaitley sticking to the fiscal roadmap in the just announced Union Budget too should give confidence to the MPC to effect a rate cut.

But, as such interest rates have already started to come down. High rate alone is hardly a reason why the bank lending is not happening to the desired extent. The reason for muted loan growth is that economic activity remains weak on the ground, though there is some revival of late as indicated by the latest data. The Nikkei/Markit Purchasing Managers’ Index (PMI) for January showed growth in manufacturing even though the services gauge showed a third consecutive month of contraction.

Corporates continue to struggle with inventory pile up on account of poor demand. The demonetisation-induced cash crunch has added to the problem. It will take a while before consumption revives. As for the individual loans, banks have already begun to lower lending rates aggressively stimulating demand.

A quarter percentage point rate cut at this stage wouldn’t make any major difference at this stage. Since January 2015, the RBI has cut its key lending rate, repo by 175 basis points. Even if the RBI announces another rate cut, it may be the last of this rate-easing cycle as experts have already pointed out.

More than the interest rates, what is more interesting to watch is RBI forecast on GDP growth and comments from governor Urjit Patel on the growth outlook. In the last policy, the central bank lowered its GDP growth forecast for the current fiscal to 7.1 percent from 7.6 percent.

But, it hadn’t fully accounted for the demonetisation impact. Then, the RBI had said that impact of demonetisation will be temporary in nature and may not have lasting impact. This time, one needs to look for any revisions in this figure particularly given that agencies such as International Monetary Fund (IMF) has lowered the India growth projection to 6.6 per cent.

Even the latest economic survey expects the growth this year to be around 6.5 per cent this fiscal and 6.75-7.5 per cent next fiscal year. Will RBI lower the growth further down from its December estimate? One needs to wait and watch. If the RBI too acknowledges the sharp downward trend in the GDP, then it confirms the fears that recovery from the demonetisation shock is going to be a time taking and painful beyond what is originally expected.