The Reserve Bank of India's (RBI) Monetary Policy Committee conducts its bi-monthly policy review next week. The majority of analysts are forecasting a 25 basis point cut in the second quarter of 2019, suggesting the central bank could cut rates either now or later in June.
However, pressure from the government to ease could well lead the central bank to opt to cut rates sooner rather than later.
At the last meeting in early February, the RBI shifted its policy stance from a standardised tightening to neutral. That being said, it ended up cutting rates by 25 basis points, catching the markets - which had expected no change - off guard.
The only supportive factor for the last rate cut was the falling current rate of inflation (CPI). Inflation expectations were still high and remained supported by loose fiscal policy and a weak currency (INR) - which were strong arguments against a rate cut. In fact, the rupee (INR) ended up depreciating by 1.9 per cent in January and was the worst contender in Asia.
Growth-inflation outlook
Consequent economic data has shown that inflation bottomed at 2.0 per cent year-on-year in January. It spiked to 2.6 per cent in February and probably marked the beginning of an uptrend on the back of firmer food and fuel prices and an election-related boost to consumer spending. Meanwhile, GDP growth continued to tip lower. Judging from a continual slowdown in exports and manufacturing, it could dip further to about 6 per cent in the current quarter.
The INR gained some ground in February in line with its emerging market peers, which benefited from a dovish turn in Fed policy. In fact, the rupee was Asia's best performing currency in March despite all the prevailing griefs - a lack of policy support, increased geopolitical tensions, domestic political risks before the general election and a persistent twin-deficit (trade and fiscal) problem. Adding to the negative outlook was the news of President Trump stripping India off the Generalised Scheme of Preferences in terms of trade status, signalling a possible shift in the US trade battle from China to India.
Risks to face due to easing
Prevailing market conditions reduce confidence in the view that the RBI will leave monetary policy unchanged for the rest of this year. The RBI could use the ongoing INR strength to deliver a rate cut next week. However, elections are just around the corner and investors might prefer to wait on the side lines until this political uncertainty lifts.
While the growth argument for RBI easing may have gained some ground, the inflation argument remains less persuasive. Although inflation may not be an issue through the first half of 2019, staying in the lower half of the 2-6 per cent RBI policy target, it's likely to be a problem thereafter, as the low base effect complicates demand-pull pressure from loose economic policies.
On the growth side, the RBI's forecast of 7.2 per cent for 2019 growth remains to seem farfetched amid a global slowdown even though it is currently benefitting from a strong domestic demand.
A loose fiscal policy removes the need for monetary accommodation. Political pressure from the government to ease remains intact, even though there are doubts that a monetary boost will really help the government to win an edge over its rivals in the coming elections.
Disclaimer:
This article was issued by Maria Fenech, investment management support officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.