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RBI Monetary Policy : To cut or not to cut

The last few months have been a roller coaster ride for our country in terms of macroeconomic indicators. Sitting at the helm of this bi-polarity of macroeconomic factors is everyone’s favourite commodity – Oil. Considering India’s heavy dependence on oil (said to be the fourth largest consumer in the world) and the fact that majority of it is imported (pegged to be in excess of 80%), it can safely be said that our country’s purse strings are firmly tied to the price of what the Saudis call liquid gold (oil). Crude oil in India hit a high of 85 $ per barrel in early October and cooled off to roughly 60 $ per barrel by end November. While the biggest benefactor of this U-turn in prices may be the common man, the volatility of global oil prices undoubtedly has an adverse effect on the decision making policy of the Reserve Bank of India (RBI). Being a heavy guzzler of oil, many other crucial macroeconomic indicators of our economy are intrinsically tied to the price of oil such as currency exchange rate, current account deficit, interest rates, inflation, GDP growth etc. The two most important indicators i.e. interest rates and inflation fall squarely in the domain of the RBI which is solely responsible to ensure that inflation does not exceed the targeted limit by keeping interest rates in check.

It is against the backdrop of these uncertain times that the RBI came out with its fifth bi-monthly monetary policy review yesterday afternoon. No major surprises were thrown at us and the policy was enacted on expected lines. The central bank did not alter its policy stance of “calibrated tightening” which it adopted in the immediately previous monetary policy review in October in accordance with the then-deteriorating conditions owing to rapidly rising oil prices. The Urjit Patel led outfit kept repo rates unchanged and cut its inflation forecast for the rest of the financial year owing to a steep decline in crude prices and food deflation.

Important parameters of the meet

This policy was broadly seen as a dovish policy which paves the way for a neutral stance in the forthcoming policy with inflation projections being significantly lowered. In spite of the shift in policy stance to calibrated tightening in the previous meeting, meaning that the central bank intended to raise rates in the following meetings, the downward swing in food inflation and oil prices might actually result into rates being slashed in the coming MPC meeting on 7th Feb 2019, which is a rarity. The RBI did not change its policy stance, although the governor did indicate that policy course could be changed soon because only the food inflation and oil prices have reduced (major components of inflation), while core inflation (inflation not considering food and energy sectors) continued to rise. The worry is that food and oil prices are extremely volatile and could bounce back at the same accelerated pace at which it reduced, hence the 6 member MPC decided to sit it out and take a call at a future date about rate reduction.

Other announcements made at the bi-monthly meet of the country’s top banking institution was the continued use of open market operations (OMO) to infuse liquidity into the ever thirsty economic system which has brought down the liquidity deficit to an eight-month low with Deputy Governor Viral Acharya mentioning the pace and quantum of such purchases may continue till March. Another important announcement was that of linking floating rate loans for retail and small & medium enterprises to external benchmarks such as repo rate, 91 or 182 day T-Bill rate or other approved benchmarks instead of to marginal cost of lending rate (MCLR) which brings uniformity and transparency into the process.

A wait and watch policy with minor tweaks to bring it up to date was what we got from our central bank this time around. The RBI, known to be a conservative organisation did not deviate from its mantle and threw out no surprises. It kept its calm in the face of its worst adversary, volatility, and frankly, that’s exactly what we’ve come to expect from our most sacred banking institution under the current leadership

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