A softer stance would be welcome for Prime Minister Narendra Modi's government.
The Reserve Bank of India is likely to change its monetary policy stance to "neutral" from "calibrated tightening" on Thursday and move closer to a rate cut in April as inflation remains below the apex bank's 4 per cent target, according to a Reuters published @moneycontrolcom.
For Prime Minister Narendra Modi's government, which wants to boost lending and lift growth in the runup to the general elections, the RBI’s softer stance would be welcome.
The interim budget presented on February 1, whereby the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing, has set the ball rolling.
according to a Reuters poll published on January 24, while two-thirds of 65 economists expected the RBI to hold the repo rate at 6.50 per cent, most respondents predicted the six-member monetary policy committee (MPC) would shift its stance to neutral. Almost half of respondents to the poll expected a 25 basis point rate cut by mid-2019.
At Thursday's MPC meeting, which will be the first for RBI Governor Shaktikanta Das, the committee will have the tough task of balancing desire to support economic growth with the need to contain inflationary expectations.
According to some economists, Das is likely to promote growth and aid the fragile financial sector, as inflation is comfortable at present, dropping in December to an 18-month low of 2.19 per cent.
"Given that inflation has crashed, oil prices are much lower than the peak, consumer durables and non-durables demand is slowing and global economy is slowing down, there is a definite scope for a change in stance and even a rate cut on Thursday will not be out of sync," the report quotes Rupa Rege Nitsure, group chief economist at L&T Finance Holdings in Mumbai.
"The actual cost of borrowing is very high for the productive sector and there is heightened uncertainty about the health of the financial sector. The RBI needs to ensure the stability of the financial sector."
There are rising concerns about non-bank finance companies since a liquidity squeeze in September and a string of defaults at infrastructure lender IL&FS triggered massive redemption by investors.
Recently, reports have surfaced about mismanagement at Dewan Housing Finance Corp Ltd, denied by the company, that hit its share price.
However, cutting rates to support the financial sector by taking comfort from the sharply lower inflation rate is not as simple as it sounds, says the report.
The report says that an expansionary budget could bolster consumer spending and stoke inflation. Further, policymakers are likely to be wary of a third straight miss on the fiscal deficit target, a key factor that weighs on the inflation outlook.
Some analysts feel that re-emergence of inflationary pressures even as growth stays subdued could keep the RBI from cutting rates.
The report adds that Radhika Rao, economist at DBS in Singapore, does not expect any cuts in 2019, given the budget and uncertainties about the outlook.
"Notwithstanding the pressures, I don't think RBI will rush through to ease rates," she said.
Source: Reuters, moneycontrol.com