What will be the RBI monetary policy committee's stance in the first post-Budget statement?

The six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, will announce the sixth bi-monthly monetary policy statement for 2018-19 tomorrow, and the big question is whether cuts in the repo rate and CRR are on the cards to ease pressure on banks.

This is not only the first MPC meeting under Das, but comes less than a week after the Interim Budget, which was packed with sops to small farmers and the middle-class with an eye on the upcoming general elections. So, as is standard practice with the post-Budget monetary policy, the ongoing meeting is expected to focus on assessing the impact of Interim Finance Minister Piyush Goyal's promises on inflation and growth as well as evaluating the government's fiscal consolidation efforts.

"The budget has given more sweeteners than expected," said Manish Sinha, Managing Director, Dun and Bradstreet. "Given such an aggressive expenditure plan and deductions given in the direct tax with no new avenues for revenue collection, achieving the fiscal deficit target for 2019-20 seems ambitious. The latest data on fiscal deficit is that we will miss the target in FY19, the second year in a row and is not credit positive."

Hence, following this populist Budget, logic dictates that the MPC may be compelled to tighten the seat belt. A research report of DBS Economics said it would be a "tricky monetary policy path for RBI" as the government projected fiscal slippage in the Budget. "The combination of fiscal challenges and rising oil prices makes the RBI's policy path a tricky one this year. Growth has largely bottomed out, but India has yet to benefit from the synchronised pick-up in global demand. In this light, we expect the monetary policy committee to turn hawkish, but not enough for the balance to tip towards a rate hike this week," it added.

On the other hand, there are many who predict a rate cut. For instance, Sanjay Chamria, the Vice Chairman and Managing Director of Magma Fincorp, believes that Finance Minister Piyush Goyal in his Budget speech has "set the stage for a rate cut by the RBI". In a similar vein, SBI's latest Ecowrap report predicted that the first rate cut might happen in April 2019, but "we will not be overtly surprised if RBI delivers a 25 bps rate cut on February 7 itself". To justify this stance, the report explained that headline inflation remains significantly benign and growth has hit a soft patch - the sharp revisions in GDP growth in 2016-17 and 2017-18 imply a less than 7% growth figure in 2018-19.

"I think the persistence of inflation at the lower end of the range as well as the fact that any extrapolations would show that it would remain well below 4% at least until July should be enough of a trigger for RBI to cut rates right away. RBI could combine it with a shift to the neutral stance, or perhaps make it more accommodative," HDFC Bank's chief economist Abheek Barua told The Economic Times. Other experts including Bank of Baroda Chief Economist Sameer Narang and analysts at Edelweiss Securities also expect the MPC to change its monetary stance to neutral from 'calibrated tightening'.

Much will also depend on the new RBI Governor. As the daily pointed out, Das, a former economic affairs secretary, may have a dovish approach initially if history repeats itself. After all, Duvvuri Subbarao, another bureaucrat-turned-governor, made six rate cuts between October 2008 and April 2009 to the extent of 425 basis points to 4.75% to match the policy stance of the then United Progressive Alliance (UPA) government. Moreover, given concerns over Brexit, the slowdown in China and Europe, and the US-China trade war, the Indian economy needs impetus for growth amid slowing private investment, which again makes a case for a rather dovish Das.

Deviating from the norm over the past two years, the Reserve Bank of India (RBI) announced on Monday that the resolution of the committee will be uploaded on its website at 11.45 am instead of in the afternoon.

(Edited by Sushmita Choudhury Agarwal; with PTI inputs)

Also read: Was infrastructure sector a gainer in the Interim Budget 2019?