The monetary policy committee (MPC) has decided to cut repo rate by 25 bps to six per cent by 4-2 vote. After a long time, repo rate is at this level. MPC has retained FY18 gross value-added growth rate at 7.3 per cent, with balanced risks while committing to keep CPI inflation close to 4 per cent on a durable basis.
We are confident of a benign inflation trajectory going forward and share the MPC view that most of the upside risks to inflation have not materialised.
Though implementation of farm loan waiver is a risk for inflation according to MPC, this will not impact inflation and bond yields as very few states are eligible for additional market borrowings in FY18 and also they are accommodating the loan waiver amount by cutting expenditure without any fiscal slippages.
Three things make us more confident of RBI delivering further rate cuts during the year, ceteris paribus.
First, the resolutions of monetary policy committee have now started elaborating more and more about the growth of the various sectors of the economy. Beginning from the last policy, every sector has been analysed and growth concerns have been suitably highlighted.
Second, coming to the observations on real interest rates, the markets may not be aware that RBI in its 2015-16 annual report had indicated that the risk-free natural real interest rate for Q4 FY15 was in the range of 0.6 per cent to 3.1 per cent. Against this background, it is very likely that the last RBI assessment of 1.25 per cent real rate may have further declined from such levels, given that growth is weak.
Third, while the nominal GDP of the US may have picked up after a dip in Q1, the underlying global conditions are still uncertain regarding growth outlook. Given this, RBI may have window to cut rates, if inflation goes as per the script.
- Soumya Kanti Ghosh
(The author is the Group Chief Economic Adviser, SBI)