Is it time to ‘step on it’ yet?

The Reserve Bank’s Monetary Policy Committee (MPC) will be holding its policy review meeting on 6th & 7th Feb, 2018 and will be sharing the outcome of the review on 7th Feb 2018. The MPC will be focusing on assessment of the current global & economic conditions and consequently comment on the medium term outlook on the critical indicators. The indicators to be focused will be consumer confidence, households’ inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters.

Currently, following are the key rates:

  • Repo Rate – 6%
  • MSF Rate – 6.25%
  • LAF Rate – 5.75%

Link to the previous monetary policy prediction:

Previous Monetary Policy Predictions!

Global & Domestic Conditions Assessment:

  • Global financial markets have remained buoyant, reflecting the improving economic outlook and the gradual normalisation of monetary policy by the US Fed
  • While bond yields in most AEs have moved sideways in the absence of inflation pressures, they have risen across most EMEs on country-specific factors
  • Retail inflation measured by year-on-year change in the consumer price index (CPI) recorded a seven-month high in October, driven by a sharp uptick in momentum tempered partly by some favourable base effects
  • The Reserve Bank’s survey of households showed inflation expectations firming up in the latest round for both three months ahead and one year ahead horizons

Inflation Assessment & Outlook:

Assessment:-

  • Food inflation has been inching up since Dec touching new highs – due mainly to vegetables and fruits. Milk and eggs inflation has shown an uptick, while pulses inflation remained negative
  • Fuel group inflation, which has been on an upward trajectory since July, accelerated further due to a sharp pick-up in inflation in liquefied petroleum gas (LPG), kerosene, coke and electricity
  • CPI inflation excluding food and fuel (CORE inflation), which increased from July onward, remained steady for the period. This reflected the softening of petroleum product prices on account of the reversal of taxes on petroleum products by the central and state governments
  • There has been an uptick in housing inflation following the implementation of higher house rent allowances for central government employees under the 7th central pay commission award
  • The Reserve Bank’s survey of households showed inflation expectations firming up in the latest round for both three months ahead and one year ahead horizons

Outlook:-

  • The CPI headline inflation is heading northwards and is expected to rise in the near future horizon basis the following:
    • Moderation in core inflation observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that this upward trajectory may continue in the near-term.
    • The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, with attendant second order effects
    • The recent rise in international crude oil prices may sustain, especially on account of the OPEC’s decision to maintain production cuts through next year
Capture
CPI Inflation Uptrend

Net net, the CPI inflation is expected to rise further. There’s a significant risk of it breaching the flexible inflation target (FIT) of maintaining the inflation between 2%-4%. However, basis the CPI numbers and forecasts, it is unlikely that the MPC would vote for a rate cut.

Gross Value Added Outlook:-

The GVA has been subdued in the past quarters and will continue to remain steady at 7-7.5% for the FY 2018-2019. The GVA is unlikely to move upwards in the last quarter of the FY 2017-18 due to the following probable impacts:

  • The recent increase in oil prices may have a negative impact on margins of firms
  • Shortfalls in kharif production and rabi sowing pose downside risks to the outlook for agriculture
  • Increasing “output gap”. The output gap is defined as the difference between the expected economic output at current utilization and the expected economic output assuming 100% capacity utilization. The capacity utilization is currently at ~72% due to increasing input costs and near stagnant demand dynamics
Capture
GVA Growth Rate Downtrend

I predict, that the RBI will maintain the status quo in order to contain the increased expected inflation and significant increase in inputs costs. CRR & SLR will be untouched due to the ample amount of liquidity. The MPC is likely to maintain the status quo with a ‘NEUTRAL’ stance & would prefer waiting for more data and indicators to be further accommodative for the following reasons:

  • Risk of inflation breaching the RBI targets
  • Increasing bond yields
  • Fiscal slippage concerns lingering

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Thank you 🙂

 

 

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Published by

Akshay Baregar

A hardcore analyst who loves to read about finance, upcoming concepts, ​and their applicability. Have always wanted to become an analyst and been thinking like one from the recent past. This is my attempt to write and make the world around me aware of the financial happenings and the likely impacts/ effects on the Indian/Global Economy. My favourite topics are monetary policies, fiscal reforms, market movements, predictions, wealth management etc . Hoping for an excellent response and feedback from the readers.

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