The RBI on Thursday confirmed what we've known all along.
That our economy needs help and both monetary and fiscal policy did little to avoid the deadlock.
Caught between an erratic slump and a dysfunctional interest rate transmission, RBI Governor Shaktikanta Das preferred to sit out this cycle keeping repo rate unchanged at 5.15 per cent citing rising inflation.
Worryingly, the RBI's Monetary Policy Committee (MPC) yet again revised downwards FY20 GDP estimates to 5 per cent from 6.1 projected just two months ago.
There was enough room to cut rates, but the MPC, as Das noted, would rather wait for 'more clarity'. Rough translation: We don't know how low growth will sink further.
Perhaps, the shocking memories of Q1 growth at 5 per cent, which Das termed was 'worse than all expectations,' are still fresh and until the air is clear on the 'unknown knowns,' RBI is unlikely to make a move. Add to this the rising households' inflation expectations, which compelled RBI into a do-nothing policy response.
"Recent inflation prints have taken precedence over the growth concerns. In fact, seemingly, the RBI is pushing the onus of growth support to the government," noted Kotak Equities Research.
In the meantime, the central bank wants to see the impact of recent government measures such as the corporate tax cuts, and last-mile relief fund for the real-estate sector. So, between now and the next MPC meeting in February, Das effectively wants fiscal policy to take the lead role and like everybody, he senses that the forthcoming Budget may have more counter-cyclical fiscal measures to bail out the economy out of its dire state.
GST collections are disappointing and RBI humbly admitted that a similar scenario in direct taxes and customs duty collections cannot be ruled out. So will RBI be overtly worried with a potential breach in fiscal deficit should government open up the money spigot to revive growth? Das gave away little, insisting that keeping national interest in mind, both monetary and fiscal levers will have to synchronize to hold the economy together.
The notable collapse of confidence among businesses and households forced Das to walk an extra mile and explicitly state that rate cuts were within the vicinity, though the quantum will depend on how the economy behaves. According to Das, green shoots were visible from the capex cycle of 1,539 listed manufacturers, still the MPC wants to rule out that the noticeable shift in fixed assets formation and reduced borrowing isn't a false dawn. "While these developments are still tentative, they would need to be carefully monitored with incoming data to look out for a durable revival in the capex cycle," he said.
Even as RBI attempts to get a thorough reading of the government measures, it has to deal with its own dysfunction of rate transmission, nudging banks to bite the bullet and pass on its 135 bps repo reduction since February. "More than flare in inflation, lack of transmission of rate cut seems to have been the bigger reason for the rate pause," said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi.
Patting itself on the back, RBI noted that it has been pre-emptive in easing monetary policy as early as February with rate cuts in quick succession, but more giveaways will have to wait. "The key consideration has to be the timing of further actions, even as we monitor the impact of actions already taken so far," Das said.
The spike in inflation was essentially due to food prices impacted by unseasonal rains, but the MPC exercised prudence to look it through and await 'greater clarity' on how prices pan out. "It's a bit worrisome that the prices of fruits and vegetables are continuing to remain elevated and in some cases it is too high that it may not come down too soon. And this would mean that the impact on CPI may be longer than expected" said Dr Joseph Thomas, of Emkay Wealth Management.