Spotlight on what Rajan may say in his last policy review today
One of the most high profile and outspoken central bank chiefs of recent times, Reserve Bank of India (RBI) Governor Raghuram Rajan will present the last monetary policy statement of his current term today. While the market has largely factored in a status quo on interest rates as Consumer Price Index-based inflation inched up to 5.77 per cent in June — higher than the RBI’s March 2017 target of 5 per cent — investors will closely watch the outgoing governor’s comments on some key issues:
Monsoon impact
One of the biggest concerns has been the impact food prices have had on recent headline inflation numbers. A favourable monsoon could help ease these concerns and Rajan’s comments could signal whether the RBI sees CPI being on course to meet the March inflation target.
“The dramatic run-up in recent CPI inflation is mainly driven by food,” said Pranjul Bhandari, HSBC India Chief Economist. “But if rains continue to be strong in August, the 110 basis points fresh food price rise and the 40 basis points excess pulse inflation could reverse, taking inflation from 6.5 per cent (sequential, annualised) now, to RBI’s target of 5 per cent by early 2017.”
GST rate
The long awaited constitutional amendment bill enabling introduction of a nationwide Goods and Services Tax (GST) was passed in the Rajya Sabha this month. The debate on the issue has now turned to what the standard GST rate could be and how that may afect inflation, at least in the short run. While Mr. Rajan has been highlighting the importance of GST, a moot question for the RBI will centre around how it opts to factor in the short-term impact of GST while taking monetary policy decisions.
Rate cut
Bank of America Merrill Lynch is one of the few research houses that is betting on a rate cut — 25 basis points (bps) today and another 25 bps before the fiscal year end.
“As this is the last policy, he may stop at a dovish signal,” said Indranil Sengupta, India Economist, Bank of America Merrill Lynch.
Mr. Sengupta said that apart from a good monsoon, the government’s commitment to 2-6 per cent inflation target, and the need to spur economic recovery by lowering interest rates could prompt the central bank to cut its policy rate. Investors will scour the statement for clues to the outlook for rates.
Message to successor
The former IMF chief economist may leave a word of caution on inflation for his successor, who is expected to face fresh demands for an interest rate cut.
“Our estimated trajectory indicates moderation towards 4.0-5.0 per cent but sustaining 4 per cent will be difficult even without factoring in statistical impact on housing due to seventh pay commission,” Suvodeep Rakshit, Madhavi Arora and Upasna Bhardwaj of Kotak Mahindra Bank, wrote in a report to clients.
Neutral liquidity
The RBI has indicated that it will move to a liquidity neutral zone where on average the liquidity in the system is zero. With liquidity turning surplus last fortnight, market participants will be keen to hear if Mr. Rajan signals how long the central bank will be comfortable with the surplus.
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