Key Highlights

  • In light of normal monsoons and cooling inflation in the economy, a repo rate cut would be in favour of growth in the economy.
  • IMD has predicted normal monsoon this year with timely arrival of the south-west monsoon winds.
  • Maintaining status quo on the RBI policy would mean a ‘dovish’ approach by the RBI that does not expect inflationary pressure in the near term.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Monsoon is known for changing its mind in India and will play a key role in the Reserve Bank of India (RBI) and Monetary Policy Committee (MPC) that will roll out its second bi-monthly monetary policy on June 7, 2017.

The MPC led by RBI Governor Urjit Patel is widely expected to keep repo rates unchanged at 6.25%.

However, this decision by the MPC would depend on inflationary impact of GST, aggressive rate hike by US Federal reserve in their future policy, volatile oil prices, GDP growth and of course the probability of a good monsoon.

Timely arrival of the south-west monsoon has given Indian Meteorological Department (IMD) reason to believe that we will have a normal monsoon this year.

A good monsoon should ideally mean a good produce for farmers to harvest. This in turn would mean a better supply to the markets and in turn prices of goods and commodities should ease bringing down inflation.

“Aiding consumption growth will be a normal monsoon, benign inflation and softer interest rates. We assume monsoon to be normal in 2017, too, which will support agricultural growth, and interest rates will soften due to improved transmission of policy rate cuts by the Reserve Bank of India,” analysts of CRISIL research said in a report dated June 2017.

Inflationary pressure subsided over the past two months with Consumer Price Inflation (CPI) that examines the weighted average of prices of a basket of consumer goods and services, cooling to 2.99% Year-on-Year (YoY) in April from an average of 4.5% YoY in FY17. Wholesale Price Index (WPI) inflation dropped to a four-month low of 3.85% in April as both food articles and manufactured items showed cooling in prices.

Keeping in mind the comfortable liquidity stance in the economy and food inflationary pressures which have been under control for now; the RBI might save rate cuts for later on in the year.

Instead of a rate cut, analysts expect these changes

Two sides of the coin

Speaking in favour of a rate cut, Finance Minister, Arun Jaitley said, “Growth and investment need to improve -- these are indicators which are available. Any finance minister under these circumstances would like a rate cut, the private sector would like a rate cut,” Arun Jaitley, finance minister, said in a statement to CNBC TV.
 
In the Care Ratings report, factors favouring a rate cut were listed as follows.
-- CPI inflation is down.
-- Moderation in global commodity prices.
-- The upside risk to the inflation could be limited with the coming monsoons forecasted to be normal and if oil prices continue to decline.

Making a case for maintain a status quo, the report said:
-- Inflation potential is still unclear on account of 7th pay commission allowances, GST implementation and an increase in minimum support prices for food articles by the government.
-- Increase in expectations of a rate hike by Federal Reserve in the month of June.

Now the full impact of GST on prices of goods and services and inflation will be known only in August when CPI data for July will be released.

“We expect only a 25 bps cut in 2017 – in second half. More likely in the month of October, once the picture is clearer,” Sabnavis added.