There was a sense of shock and surprise in the markets when the RBI chose to hold status quo on rates in its October policy. But that is exactly what we had written last week that the justification for a rate hike was just not there. After front-ending your full year rate hikes in June and August itself, the RBI did not see any specific reason to hike the rates. It was basically the analysts who had read the situation wrong.
If one were to look at the voting pattern of the Monetary Policy Committee (MPC), then the tilt was clearly in favor of encouraging growth. The IIP and the core sector have just started showing some green shoots of recovery. The PMI Manufacturing has just about shown a recovery from the lows following the note ban. The GDP growth for the first quarter had recorded a multi-quarter high of 8.2% and it clearly pointing towards a likely full-year growth rate in excess of 7.5%. A rate hike at this point of time would have been entirely uncalled for and would have only tightened the money markets without any concomitant benefit. The MPC has played its cards very smartly. It has held rates but changed the monetary policy stance from “Neutral” to “Calibrated Tightening”. This opens the gates for the RBI to hike rates in future if justified by the macro data flows. For now the RBI has announced that it does not intend to disrupt the nascent recovery.
The way inflation has shaped up in the last few months since the rate hikes were implemented, it is clear that inflation is tapering closer to the long term rate of 4%. So there was no real reason to push the rate hike through. Despite, the MSP worries, the Kharif crop is expected to be 5% higher than last year and that is likely to put supply pressure on prices. Hence inflation may not really be a concern and could be within the limits. The RBI has also expressed concerns over the trade war between the US and China and believes that it could also be an inflation dampener. Under these circumstances the RBI’s estimate is that the economy is nowhere close to runaway inflation.