Monetary Policy Day Guide: Will India’s MPC Go For A Six?

India's Monetary Policy Committee will likely cut rates for the sixth consecutive time on Thursday as it concludes its three-day meet against the backdrop of weak growth and modest inflation.

Economists polled by Bloomberg are forecasting a 25 basis point cut in the repo rate to 4.9 percent. This would take the benchmark policy rate down to its lowest level since after the global financial crisis.

The Indian economy may not be facing the kind of financial crisis that it was a decade ago when rates were this low but it is facing a near-crisis of growth. At 4.5 percent real GDP growth and 6.1 percent nominal GDP growth, the Indian economy is looking weaker than it has in years.

Yes, headline inflation has risen above 4 percent, the mid-point of the MPC's 4 (+/-2) percent target, but with growth running well below potential, the wide output gap will likely prompt the committee to sign-off on another rate cut.

Here's what BloombergQuint will be watching for in the MPC's statement and the press conference that follows.

Growth Forecast: Will They Cut Again?

After holding on to an unrealistically high growth target for FY20 between its February and August policies, the RBI finally bit the bullet and cut its forecast at the October meet.

Despite growing signs that the weakness in the Indian economy had gone well beyond a typical cyclical slowdown, the RBI had maintained that FY20 growth will remain at about 7 percent. It pegged this forecast down sharply—the steepest such cut in recent years—to 6.1 percent at its October meet.

Unfortunately for the central bank, growth indicators have weakened further. And to get to 6.1 percent, the economy will need to grow at over 7 percent in the third and fourth quarters. That looks unlikely and so private forecasters are now pegging growth between 4.9 percent and 5.4 percent.

Will the RBI retire hurt and cut its forecast again? And whether it will answer the question that it had asked in its own annual report: “The key question that confronts the Indian economy as it looks ahead to the rest of 2019-20 is: are we dealing with a soft patch, or a cyclical downswing, or a structural slowdown?

We're watching closely.

Inflation: Are They Worried About The Onions?

In the hierarchy of concerns, inflation, despite the recent rise to 4.6 percent, remains secondary. Still, inflation concerns can't completely be dismissed.

In fact, one of the reasons that the Urjit Patel committee of 2014 had recommended targeting of headline inflation and core inflation was the tendency for food inflation to get generalised quite quickly in India.

Other concerns like higher telecom tariffs may also add to inflation in the months ahead.

Also, technically, the monetary policy committee is mandated to target headline inflation, as Governor Shaktikanta Das had stressed in his first post-policy press conference.

What the committee will be judging is whether it needs to alter its 12-month ahead inflation forecast and if that warrants a pause in the rate-cutting cycle.

Financial Sector Logjam: Any New Ideas?

It's now been a year since India's credit markets have been in flux.

Two large entities—Infrastructure Leasing and Financial Services Ltd. and Dewan Housing Finance Ltd.—have failed. Despite a flood of liquidity, complaints of lack of availability of funding have not gone away.

Both bank and non-bank lending to the economy remains weak. Bank non-food credit growth remains below 8 percent and NBFC sanctions fell 34 percent in the July-September quarter.

At the time of the October policy, the Monetary Policy Report had detailed this decline in credit flow to commercial sector. But neither the committee nor the RBI offered anything that looks like a solution.

Will we get any new ideas? Or even a hint that the RBI is working on ways to ease the logjam?

Hint Of ‘Unconventional' Measures?

Till a few policy meetings back, the money markets were clamoring for easier liquidity. Finally, they have plenty of that.

The liquidity has gushed into short-term debt paper. The latest cut-off at the auction of 91-day treasury bills came in at 4.89 percent on Wednesday, below the overnight repo rate of 5.15 percent. Short-term commercial paper yields for certain corporates and non-bank lenders have also fallen sharply.

But long-term bond yields remain relatively elevated at 6.47 percent—more than 100 basis points above the policy rate.

There are other issues such as the weak money supply growth (as measured by M3-to-GDP) and below-par monetary multiplier (which reflects the pace at which central bank money is converted into commercial bank money).

Is it time for India's version of ‘Operation Twist' or a ‘QE' with Indian characteristics?