The ongoing Monetary Policy Committee (MPC) meeting could be an interesting one as it happens just a week before the general elections kick in. The moral code of conduct is under way, and there is little that the government can do directly. However, should the RBI become too lenient, it may give sceptics an opportunity to say that it was ‘influenced’ by the government of the day. While former RBI Governors Raghuram Rajan in 2014 and YV Reddy in 2004 had kept the policy rate unchanged, D Subbarao reduced it by 25 basis points (bps) in 2009.

The MPC has plausible reasons to reduce the repo rate marginally this time round, unless it decides to wait and watch the impact of the previous policy. The MPC in the sixth bi-monthly monetary policy statement, in February 2019, decided to reduce the policy repo rate under the liquidity adjustment facility by 25 bps to 6.25 per cent. The MPC also decided to change the monetary policy stance from calibrated tightening to neutral.

The MPC meeting will be referring to retail price inflation, measured by the Consumer Price Index (CPI), which rose 2.57 per cent in February 2019 compared with 4.44 per cent in the corresponding period last year. Any spiralling of inflation is unlikely in the first quarter of this fiscal (FY20) given that the supply of food, which has 47.25 per cent weightage in the CPI, is expected to be adequate.

While inflation has been tepid, factory performance is lagging. The IIP (index of industrial production) fell to 1.66 per cent in January 2019 from 2.60 per cent in December 2018. The lacklustre performance in industrial production since November 2018 also gives a conceivable reason for the RBI to cut rates once again in April 2019.

India’s GDP growth slowed to a five-quarter low of 6.6 per cent in the December quarter and is expected to fall further to 6.4 per cent in the March quarter, thereby giving scope for another round of rate cuts to support growth.

As far as liquidity is concerned, the US Federal Open Market Committee (FOMC) changed its stance to no rate hikes in 2019 as against its earlier proposal of two hikes. This though is unlikely to influence the RBI’s decisions as India’s monetary policy is driven by inflation. However, lower Fed rates will help in India’s external commercial borrowings and retain foreign portfolio inflows in the country. The Fed raised the funds rate to a target range of 2.25-2.50 per cent in December 2018. The move marked the fourth increase in 2018 and the ninth since the Fed began normalising rates in December 2015.

With inflation being benign in the last few months and below the RBI’s target, coupled with a weak growth profile, the MPC could possibly go for another rate cut.

(The author is an Economist with Exim Bank. The views are personal.)