03 Oct Monetary Policy: What the Data shows…
A lot has changed since the 9 August monetary policy review. There is a new governor at the Reserve Bank of India (RBI), a new policy framework under which rates will be set by a committee rather than an individual, and a medium-term flexible inflation target of 4% plus/minus two percentage points notified by the government. Beyond that, retail inflation has softened while the pick-up in growth has been gradual. While the committee is to decide only on the policy rate, factors such as the US Federal Reserve’s indication of a December rate hike, the FCNR-B outflows, state of liquidity and commodity prices will weigh on the decision. Here’s a look at what data shows ahead of the monetary policy review.
Inflation has come down; will it sustain?
Retail inflation has slowed to 5.05% in August, a tad above RBI’s March target. That has been mainly owing to a sharp deceleration in food inflation. With good rainfall, higher-than-normal crop area under cultivation for grains and pulses, and the seasonal factors coming into play, food inflation could slow further. However, core inflation remains stubborn.
A gradual pick-up in growth
Economic growth slowed in the June quarter. Industrial production declined in July, imports continue to drop showing weak demand and private capex spending trend remains sluggish. There are some bright spots such as auto sales. The festival season and pay commission payout to government employees is expected to help.
Foreign money continues to flow
The rupee has been one of the worst performing currencies in Asia this year, but that is owing to the central bank soaking up extra dollar liquidity to build reserves and protect the local currency against volatility. Despite growth below its potential, India remains one of the bright spots in the world and foreign investors continue to buy local securities. Forex reserves now account for close to 10 months of imports.
Markets uncertain about rate cut
Intro: Since the last policy, bond yields have fallen by around 28 basis points to around seven-year lows, though that is as much a function of liquidity as of expectations of a rate cut. In equities, rate sensitive stocks such as some auto and banking scrips have done better than the benchmark Sensex, but not enough to show unbridled optimism about a rate cut.
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