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3 reasons why RBI may soften its hawkish commentary

LiveMint logoLiveMint 06-06-2017 Alekh Archana

It is not just the rate action but the language of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) that will be keenly watched when the decision is detailed on Wednesday. The key reason for this has been the changing growth-inflation dynamics, which in theory warrants a rate cut. However, none of the 12 economists polled by Mint expect the RBI to tinker with rates on the view that the central bank may want to wait and see a more sustained trend before changing its policy stance from neutral. But a softer or rather a less hawkish tone is definitely a given.

Graphics: Prajakta Patil/Mint

Inflation and growth

Since the previous policy review in April, inflation as measured by the Consumer Price Index (CPI), has fallen to a record low of 2.99% in the first month of the fiscal year. Economists expect the next CPI print also to be sub-3%, sharply below the 4% target that the MPC is committed to.

Another factor that indicates that the RBI may adopt a softer stance is the weak economic growth. Demonetisation has led to growth slowing to 6.1% in three months through March.

It remains to be seen whether the impact of demonetisation is transitory.

Easing risks to inflation

Implementation of goods and services tax (GST) and monsoon rains, key risk factors to inflation flagged in the April policy, have eased substantially. Additionally, FX rate appreciation has added to disinflationary trend and upside to crude prices is seen as limited.

Falling yields

Since the release of April CPI data, yields on 10-year benchmark government have fallen by around 27 basis points, indicating that bond traders have already factored in a dovish tone from the RBI.

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