Change in RBI’s policy stance hints at more rate cuts: Nomura

PTI Mumbai | Updated on June 21, 2019 Published on June 21, 2019

Limited effect for interest rates

The Monetary Policy Committee meeting minutes reveal that the change in RBI’s policy stance will deliver more rate cuts in the future, a report said on Friday.

RBI Governor, Shaktikanta Das, speaking after the policy review on June 6, had limited himself to say that the shift in policy stance to “accommodative” must be seen as there being no rate hikes in future.

Japanese brokerage Nomura said Das’ explanation went by the “technical definition” on the policy stance.

“...we believe the MPC members have implicitly signalled that the economic climate has become more conducive for continued easing. The unanimous adoptions of a 25bps rate cut and change to ‘accommodative’ stance would reinforce this view,” it said in a note.

A majority of the MPC members will continue to favour further easing of rates at the next meeting in August.

It said in the minutes, Das points to a “decisive monetary policy”, external member Ravindra Dholakia calls for cuts of 0.50 per cent to narrow the real interest rate, while Pami Dua speaks of the need to “boost sentiment”.

The brokerage said Deputy Governor Viral Acharya and external member Chetan Ghate, two dissenters on the six-member panel, have done a “volte face” citing the negative output gap.

On inflation, the brokerage said the MPC members seemed to be surprised by the sharp fall in core, demand-driven inflation, although they continue to warn of increasing food price inflation.

“Overall, we find that there is a clear shift in the MPC members’ policy function to a framework prioritising growth rescue in the window that low inflation provides,” it said.

It can be noted that GDP data for the March quarter suggested growth declining to a nearly five-year-low of 5.8 per cent, while the same for FY19 came at 6.8 per cent, much below the potential of the economy, pegged at over 7 per cent.

Nomura said despite the unison on supporting growth, the rate setting panel is divided on fiscal policy and food risks, with Acharya and Ghate being on one side.

The brokerage said it was “surprised” to not find any explicit mention on the crisis within NBFCs.

“We believe the reticence to comment on the shadow banking crisis may reflect the MPCs view that financial regulations remain beyond their remit, or that they do not believe the risks of systemic contagion are significant,” it said.

Published on June 21, 2019
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