India’s Central Bank to Keep Focus on Inflation: Decision Guide


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Inflation above 7% will leave the Reserve Bank of India with little option but to hold interest rates Thursday, while keeping the door open to further easing to support economic growth.

After five rate cuts last year, inflation well above the 2%-6% target and the government’s plans to widen its budget deficit, the six-member Monetary Policy Committee under Governor Shaktikanta Das may pause for a second meeting.

India’s Central Bank to Keep Focus on Inflation: Decision Guide

All 37 economists in a Bloomberg survey predict the benchmark repurchase rate will stay at 5.15%, the lowest level since 2010.

Growth remains a worry, and with the government failing to provide a big stimulus in its budget to spur demand, the RBI will likely keep its policy stance accommodative, indicating it may ease later in the year.

The MPC will include a new member at this meeting, Janak Raj, who was recently appointed executive director of the RBI’s monetary policy department. The rate decision will be announced at 11:45 a.m. in Mumbai Thursday, followed by a press conference 15 minutes later by Das.

Here’s what to watch out for:

Inflation Trajectory

The central bank could raise its near-term forecasts after inflation surged to 7.35% in December, the fastest pace in more than five years. The RBI’s previous projection was for price growth of 4.7%-5.1% in the six months through March 2020 and 3.8%-4% in the first half of the next fiscal year.

Inflation, which has been fueled by rising food costs, may come in above 7.5% in January, said Rahul Bajoria, senior India economist at Barclays Bank Plc in Mumbai.

“Any sign that households are continuing to revise longer-term expectations higher likely would be viewed as a red flag by policy makers,” he said.

Core inflation, which strips out volatile items like food and oil, remains subdued at 3.75%.

India’s Central Bank to Keep Focus on Inflation: Decision Guide

Green Shoots

There are early signs of a growth turnaround with recent coal, steel, cement and electricity production data showing some recovery. Business confidence in manufacturing has also improved, with the purchasing managers index reaching its highest in almost eight years in January.

Growth is seen rebounding to 6%-6.5% in the fiscal year starting April, from an estimated 11-year low of 5% this year, according to the finance minister’s economic adviser.

India’s Central Bank to Keep Focus on Inflation: Decision Guide

Risks remain, however. The coronavirus outbreak will curb growth in China and weigh on the global outlook. That could prompt the U.S. Federal Reserve to lower interest rates, which in turn could give the RBI reason to cut as well, Jahangir Aziz, global head of emerging market economics at JP Morgan Chase & Co. in Singapore told BloombergQuint. He is forecasting 50 basis points of rate cuts in India in 2020.

Budget Relief

The government will widen its budget deficit in the year through March to 3.8% of gross domestic product, and plans to shrink it next year to 3.5%.

“The MPC will weigh limited explicit fiscal support for growth, still mixed signs of growth pickup and emerging headwinds to growth from global developments such as the health scare in China,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai. “In this backdrop, the MPC might decide to wait for more data and clarity before making up its mind in April.”

Twist or Not

Bond traders will look for clues from Governor Das’s press conference on whether the central bank will extend its open-market debt purchases. The Federal Reserve-style Operation Twist -- buying long-end debt while selling short-tenor bonds -- is key to sustaining recent gains in sovereign bonds.

©2020 Bloomberg L.P.

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