Electoral Cut

The RBI surprised the market with a cut in repo rate and may well follow up its inflation bet with another rate cut.

First, it was a 'farmer-friendly' Interim Budget, and now clearly, the Reserve Bank of India's new Governor, Shaktikanta Das has stepped up.

Betting on a benign inflationary scenario, the RBI expects the Consumer Price Index (CPI) or retail inflation to remain below 4 per cent in 2019. Based on the lower inflation outlook, the Monetary Policy Committee (MPC) decided to reduce the repo rate by 25 basis points to 6.25 per cent; and given the inflation trajectory, there may be another cut this April.

Domestic economists and global observers alike were surprised by this rate cut since they expected a 'hold'. While the move certainly supports growth, the RBIs inflation projections are quite optimistic. To begin with, the RBI has been consistently missing its inflation projections for the past one year. The CPI was below 4 per cent for only five months and there is no long-term sustainable trend of low and stable CPI. Core inflation (sans volatile food and fuel), meanwhile, is still sticky, and there are no signs of stabilisation in prices of education or healthcare. There is a possibility of fiscal slippages in an election year.

Now add to that the fact that crude oil prices are volatile owing to geo-political tensions - for instance, US sanctions on Venezuela, an oil producing country, could hurt oil supplies in the near future. The risks to inflation were probably why the MPC's rate cut decision was not unanimous with two of six members voting against it. Now it'll be all about how inflation plays out.