RBI unlikely to change its policy stance

Challenges yet to inflation and inflationary outlook

Dr. Sunil Sinha, Principal Economist, India Ratings and Research (Fitch Group) expressed view on  RBI's Fifth Bi-monthly Monetary Policy Statement 2018-19 says, as expected RBI kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5%.

Although RBI has lowered its CPI inflation projection to 2.7%-3.2% in H2:2018-19 and 3.8%-4.2% in H1:2019-20 as against its earlier projection of 3.9%-4.5% in H2:2018-19 and 4.8% in Q1:2019-20, it still believes that there are challenges to inflation and inflationary outlook. 

These could emanate from (i) volatility and sudden spike in prices of perishable food items, (ii) risk from revision in minimum support prices (MSPs) which has yet not played out fully, (iii) crude oil prices due to geo-political tensions/decision of OPEC to cut production, (iv) volatility in global financial market, (v) fiscal slippages and (vi) staggered impact of HRA revision by State Governments.

Clearly so long RBI does not get convinced about the sustainability and continuance of the low inflation rate witnessed currently it is unlikely to change its policy stance from calibrated tightening to neutral. Although future actions by RBI will remain data dependent, India Ratings and Research believes if the current growth inflation mix sustains then there will be no rate hike in the near term. 

Further RBI’s move to align liquidity coverage ratio (LCR) with statutory coverage ratio (SLR) is welcome move. According to Basel 3 norms banks are presently required to keep high quality liquid assets up to 90% of the stressed demand on the liability for 30 days. This is being increased to 100% from 1 January 2019. Thus RBI has decided to bring down the SLR to 18% from the present 19.5% by reducing it 25 basis points each over the next six quarters.