The latest RBI credit policy was an exercise in ensuring that the signs of nascent recovery don』t get wiped out by the central bank becoming an inflation hawk. It is pertinent to note that one member out of six was in favour of a rate increase. But the RBI decided to press the trigger only when growth makes a decisive comeback.


The RBI expects inflation to moderate in the second half of FY19, riding on the base effect. The growth forecast for that period, too, is a tad softer for the same reason. Should inflation surprise on the upside, RBI might not shy away from taking rates up at that stage. Thus today’s neutral stance gives the market a breathing space of six months.


Inflation – nudged up


On expected lines, RBI has nudged the near-term inflation forecast upwards. Since the actual inflation in Q3 FY18 turned out to be 4.6%, towards the higher end of RBI’s last meeting’s projected level of 4.3-4.7 percent, the inflation forecast for the final quarter of FY18 now stands raised to 5.1% (that includes 35 basis points of impact from an increase in House Rent Allowance).


Near term, the shortfall in area sown for rabi crops and the elevated households』 inflation expectations amply justify the RBI’s concern.


For FY19 CPI (consumer price inflation) is estimated in the range of 5.1-5.6 per cent in the first half and 4.5-4.6 per cent in the second half.


However, there are upside risks to the softer inflation number of H2 FY19. A future rate decision would therefore be contingent on


Behaviour of crude and non-oil industrial commodity prices
Improved economic activity giving firms the power to pass on higher input costs
Staggered impact of HRA increases by various state governments
The revision of MSP (minimum support price) in kharif season as indicated in the Union Budget
Impact of an increase in customs duty on a number of items in the Budget
Probable fiscal slippage as indicated in the Union Budget that could impact the inflation outlook
Softer food inflation assumption on expectations of a normal monsoon

Growth outlook – underlying confidence better                                                             


After sticking to a GVA (gross value added) growth target of 6.7% for FY18 for long, the RBI has marginally tweaked it down to 6.6% in this policy, although it remains higher than CSO’s forecast of 6.1%.


However, its overall tone on growth is optimistic. The central bank alluded to improved business sentiment in the Indian manufacturing sector as reflected in its Industrial Outlook Survey (IOS).


Consequently, GVA growth for FY19 is projected at 7.2 per cent – in the range of 7.3-7.4 per cent in the first half and 7.1-7.2 per cent in the second half. This is closer to the recent Economic Survey’s projected GDP growth rate between 7-7.5% in FY19.


Should growth surprise on the upside and inflation cross the RBI’s stated comfort zone, a rate action in the second half of FY19 looks probable.


RBI in fact has highlighted several upside risks to growth:


Stabilisation of GST implementation which augurs well for economic activity.
Early signs of revival in investment activity as reflected in improving credit offtake, large resource mobilisation from the primary capital market, and improving capital goods production and imports.
The recapitalisation of public sector banks that should improve credit flow
Improved outlook on exports on account of improving global demand

However, while recognising these upside risks, RBI also is mindful of the risk of global monetary policy normalisation (rate increase) and the impact it would have on markets and confidence of external investors. Given the recent volatility in the markets, a pause was therefore considered prudent.


Relief for small business


To alleviate the near-term GST pain for small businesses, for the GST-registered Micro, Small and Medium Enterprises (MSMEs) with exposure upto Rs 25 crore to financial institutions (that are standard assets), the repayment window has been raised to 180 days from 90 days for payments due between September 1, 2017 and January 31, 2018. Loans upto Rs 10 crore to MSME will now be a part of priority sector lending instead of the erstwhile Rs 5 crore.


Since MCLR (marginal cost based lending rate) is more sensitive to policy rate signals, a methodology of determining benchmark rates by linking the Base Rate to the MCLR has been suggested. This should further improve monetary transmission.


Recognising the growing importance of NBFC (non-banking finance companies) in the financial system, an Ombudsman Scheme for addressing grievance of deposit-taking NBFC’s customers has been proposed.

Thus, in this policy while striking the balance between inflation vs growth, RBI has given precedence to growth at this juncture, which should soothe sentiments of an otherwise nervous markets.


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