Global Macro Eco |
NAOn the 4th
of October, the RBI Governor will present the fourth bi-monthly Monetary Policy
Statement for 2018-19. Itcomes against the back drop of a rather interesting
economic landscape.
· Interest rates–
For the first time in over four and a half years, the RBI raised the repo rate
in two consecutive bi-monthly Monetary Policy meetings (June
and August 2018), by 25 basis points each time, bringing it to 6.5%. Meanwhile,
short term rates (as captured by the 91 day T-bill) have been rising since
April 2018 while long term rates (as reflected by 10 year bond yields) have
been on a rising trend for over a year.
·
GDP – The economy
grew 8.2%Y-o-Y in the quarter ended June, 2018, on the back of a strong
performance in core sectors, including manufacturing,
electricity, gas, water supply & other utility services and construction. This was a considerable mark-up over the robust 7.7%clocked
in the last quarter of FY2018 and beat market expectations of 7.6% by a wide
margin. In fact, it was the strongest growth rate since the first quarter of
2016.
· Inflation - According
to the Central Statistics Office (CSO),Consumer Price Inflation rose 4.17%Y-o-Y
in July, declining from the five-month high of 4.9% in June. A combination of a
good monsoon and lower prices of pulses, vegetables and sugar kept the CPI in
check, despite the upward pressure from rising crude and
petroleum prices.While the July figure was
within the Monetary Policy Committee’s(MPC)CPI-based retail inflation target of
4.2% for July-September but higher than the medium term target of 4%.
· Rupee – Although
the Rupee was hammered down against the Dollar by close to 14% YTD, the
real effective depreciation of the Indian rupee this year as compared to its December
2017 level is around 6-7%, according to the IMF, due to the fact that the
currencies of many of India’s trading partners, including those in the emerging
markets, too have depreciated against the dollar.While the RBI has adequate
reserves to defend the Rupee for now, it seems to be allowing it to fall
adequately, to accommodate rising crude prices and other fundamental downward
pressures.
· Global
scenario – President Trump’s mission to Make
America Great Again seems to be impacting the rest of the globe rather
adversely. With the rise in the dollar and the ongoing trade war,
the US appears to be the only leading nation likely to continue to witness
acceleration in economic growth, as the benefits of President Trump’s tax cuts
unfold.
Expectations from this policy
With this interesting
pattern of economic indicators, there certainly seems to be no impetus to
reduce rates, since the economy is demonstrating strong growth and inflation
has cooled. At the same time, the RBI may not want to burden corporates, which
are already struggling with rising crude costs and a falling rupee, so the RBI
may think twice about raising rates further.
However, with the global scenario deteriorating and the rupee still
facing downward pressure, it still may be an option that the central bank
considers. All things considered, the MPC is most likely to keep rates steady
with a fair chance of raising them a little.