Contrary to consensus and previous MPC meets, a much more vocally engaging RBI prematurely reduced repo rate by 25 bps to 6.25% from 6.5% and softened the stance to Neutral from Calibrated Tightening. Some emphasis was made on the (worryingly) weakening macro which prompted the new Governor in his first innings to go all-out and serve a duet of rate cut AND stance softening.
DANGEROUSLY DOVISH: FOCUS NOW ON MONETARY POLICY TRANSMISSION
Contrary to consensus and previous MPC meets, a much more vocally engaging RBI prematurely reduced repo rate by 25 bps to 6.25% from 6.5% and softened the stance to Neutral from Calibrated Tightening. Some emphasis was made on the (worryingly) weakening macro which prompted the new Governor in his first innings to go all-out and serve a duet of rate cut AND stance softening.
KEY HIGHLIGHTS
- Voting consensus:
Note: PD: Dr. Pami Dua, CG: Dr. Chetan Ghate, MP: Dr. Michael Debabrata Patra, VA: Dr. Viral V. Acharya, SD: Shaktikanta Das, RD: Dr. Ravindra H. Dholakia
- The next meeting of the MPC is scheduled from 02-04-April 19.
- Global economic health weak: The U.S. and the Euro area continue to weaken with slower economic and industrial activity. Partial government shutdown further clouds U.S Outlook. Emerging economies like China and Russia also lost traction due to growth deceleration and soft oil prices.
- Domestic economy in sluggishness: FY19 GDP growth came in at 5-yr low; Q4FY19 at 5.8% was also at 20-Q low and both below expectations. GFCF as a % of GDP cracked after 2-years of govt. investment led improvement and IIP got dragged into negative zone by Capital Goods. Consumption growth in GDP looks to be stable so far, but Auto volumes have degrown for 6 months in a row and FMCG companies have complained about weak rural demand impacting volumes. Must agree though that capacity utilization is relatively stable at 75% (above long-term averages) and PMIs in expansion zone for 22-months (though trending down). Latest IMD estimates suggest Normal Monsoon and continuing El Nino conditions.
- Domestic economy broadly stable: First Advance Estimates (FAE) place FY 18-19 Real GDP at 7.2% featuring acceleration in GFCF, moderation in Consumption Expenditure (both private & public). Net export drag is also expected to moderate. Rabi sowing to pick up by season close, shortages likely to be offset by longer winter led higher wheat yields. capacity utilization at Q2FY19 improved to 74.8% vs. 73.1% in Q1FY19 and PMIs have remained in expansion mode.
- Real GDP: Going forward, aggregate bank credit and overall financial flows to commercial sector to affect growth outlook. Soft crude prices, impact of rupee depreciation on exports and slowing global demand could pose headwinds to GDP growth.
Source: MPC Policy Statement, Feb-19
- Significant inflation cooling: Headline CPI, declined from 3.4% in October 2018 to 2.2% in December 2018, the lowest print in the last eighteen months. While 5 Food items were in deflation in December 2018 and Fuel also softened, excluding these two i.e. Core Inflation remained thereabouts at 5.6% in Dec-18 vs. 6.2% in Oct-18. The RBI reiterated that it would stick to its mandate of headline inflation targeting instead of core.
CPI Trajectories (% yoy)
CPI Trajectories (% yoy)