MPC meet: Looking at status quo

• HDFC
• 31 Jul 2018
• Knowledge Centre

HDFC, Tester

The central bank’s Monetary Policy Committee (MPC) will conclude its 3-day bi-monthly policy review on 1st August 2018, with the announcement of its stance on its short-term lending or repo rate.

 

Despite elevated oil prices and the Government approving a steep rise in the minimum support price (MSP) of crops, we believe that there is a strong possibility of there being no change in the repo rate this time around. Uncertainty on how the global trade war pans out also supports this view, and points to the MPC adopting a ‘wait and watch’ stance at this juncture.

 

Some Pointers

 

It can be safely said that that the Indian economy has recovered from the disruption caused by demonetization/GST. However, as of now, we cannot affirm that it has attained the much-needed growth acceleration.

 

Though currently high, core inflation is expected to ease in the coming year. It stood at 6.28% in June 2018, the highest in more than 3 years. This prodded the central bank to increase the repo rate by 0.25% to 6.25% in the last monetary policy review in June 2018. This stand was endorsed by all six members of the MPC. At that point, the committee earmarked two parameters that would be triggers for action going ahead – retail inflation and the impact of the hike in MSP.

 

“Inflationary risks are still there, but the rise in food prices (in June 2018 and July 2018) has been lower than the historical trend. This sort of sub-par food inflation could be underlined as an offsetting factor against the MSP risk and elevated core inflation,” says Mr. Deepak Jasani, Head Retail Research at HDFC securities Ltd.

 

Looking ahead

 

The hike in the repo rate in June 2018 was accompanied by a marginal increase in the inflation projection. However the MPC’s stance remained unchanged at ‘neutral’, implying that the central bank was not willing to indicate the start of a rate hiking cycle in the country.

 

On the positive side, portfolio inflows into Indian markets (equity and debt) have displayed some stability in recent weeks. After witnessing outflows to the tune of US$ 3bn (on an average) in the last three months (April 2018-June 2018), the trend in July 2018 has been fairly placid, with merely a total of US$ 0.1bn flowing out of the equity and debt markets.

 

However, going ahead, the liquidity situation is likely to worsen as the borrowing programme gains steam. It is important to note that both the Centre and State Governments are likely to conduct a large part of their borrowing programme in the second half of this year. With already-elevated bond yields, the MPC is unlikely to send very hawkish signals to the market with back-to-back rate hikes.

 

“Though it is believed that there is a possibility of the central bank hiking the repo rate twice in FY19 by a quarter percentage point each time, opinions differ regarding the timing of these hikes. We believe that the central bank will opt for a status quo stance in the MPC’s meet in August 2018,”concludes Mr. Jasani.