Upasna Bhardwaj The MPC delivered a fairly balanced and neutral monetary policy this week, maintaining the status quo. The markets were mostly expecting a relatively hawkish guidance against the adverse global and domestic backdrop. Concerns of global monetary policy normalisation, secular uptrend in prices of crude oil and other commodities, domestic uptick in inflationary pressures and fiscal slippage have clouded market sentiments.

While the MPC continues to highlight these risks, it also remains cognisant of the fledgling economic recovery. Its statement noted that, “the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management”. The MPC reduced FY2018 GVA growth forecast marginally to 6.6 per cent from 6.7 per cent. FY2019 GVA growth is projected at 7.2 per cent with risks evenly balanced. Clearly, the growth outlook will be influenced by factors such as resolution of teething issues in GST implementation, early signs of improving investment activity, recapitalisation of PSBs and NPA resolutions, global demand and evolution of oil prices.

Price concerns

On the inflation side, MPC revised inflation estimates up by 40 bps to 5.1 per cent in Q4 FY18. CPI inflation for FY2019 is estimated 5.1-5.6 per cent in H1 and 4.5-4.6 per cent in H2. However, the MPC has noted that the inflation risk is likely to be on the upside owing to various uncertainties such as staggered impact of HRA increases by States and its second round impact, a global growth-led pressure on crude oil and other commodity prices, possible increase in Minimum Support Prices (MSPs) for kharif crops as suggested in the budget, increase in customs duty on a number of items, fiscal slippage and tightness in financial conditions due to domestic fiscal developments and normalisation of DM monetary policy. But the MPC did take note of some offsetting factors such as subdued capacity utilisation, possibility of softer oil prices and moderation in rural wage growth.

The tone of the policy statement in itself seems to suggest that the MPC will remain on a wait-and-watch mode, at least through the June policy, even as inflation trends higher in H1 FY2019 as it gets more clarity on the monsoons, sustainability of high crude oil prices post the winter squeeze and global financial conditions. We maintain our expectation that CPI inflation out-turns in H1 CY18 will be crucial in assessing the next move of the RBI.

The MPC’s fan chart indicates March 2019 inflation at around 4.5 per cent. This is close to our estimate for end-March 2019, even as the peak of inflation witnessed around June could be marginally higher than MPC’s estimates.

Overall, while this policy seems to be broadly more balanced than expectations, we continue to focus on the underlying trends in inflation given the MPC’s mandate to anchor inflation around 4 per cent on a durable basis. With the risks on inflation being more skewed on the upside than downside, we do not see any room for further monetary accommodation. That said, the RBI still seems in no hurry to hike just yet, given the uncertainties around both inflation and growth trajectory.

The writer is Senior Economist at Kotak Mahindra Bank. The views are personal