Macroeconomic Headwinds turn to Tailwinds in Favour of Domestic Businesses

Economy & Policy | 08 February 2019

After a rather non-committal monetary policy announcement in December 2018, which left both the repo rates as well as the policy stance unchanged, the sixth and final bi-monthly  policy for FY2019 came across as quite decisive and displayed clear direction.

The policy repo rate was reduced to 6.25% and the Monetary Policy Committee (MPC) voted unanimously to shift the monetary policy stance from ‘calibrated tightening’ to ‘neutral’.

But was that turn around so surprising? Not really. Even a superficial glance at what initially prompted the adoption of ‘calibrated tightening’ in the October 2018 policy reveals a completely different macro-economic landscape. The decision to pull interest rate cuts off the table came at a time when crude oil prices were testing new highs and the rupee was depreciating against the dollar with equal sharpness.

On the flip side, economic growth was strong and inflation was mild. All these factors suggested that keeping interest rates steady or rising would be an acceptable trade-off to ensure that price stability was maintained in the future.

Come December and the economic situation had become more salubrious. The rupee had steadied against the dollar and crude prices began to stabilize too. Yet it seemed too soon to change the monetary policy stance amid such nascent good news.

Finally, coming to the present, as the MPC narrated, global growth has begun to slow down across key advanced economies (AEs) and in some major emerging market economies (EMEs) as well. World trade is also losing momentum. While international commodity prices, especially of crude, have recovered from their December lows, they remain soft. In consonance, inflation has edged down in major AEs and many EMEs. On the domestic scenario, the CSO pegged India’s real GDP growth at 7.2% in FY2019, with gross fixed capital formation (GFCF) accelerating, but consumption expenditure moderating and net exports improving. Even investment demand lost pace in the third quarter of FY2019, while credit flows to industry remain muted. Even expected inflation is trending on a downward path. All these factors certainly suggest that reducing rates would give investment and consumption a boost, and thereby growth, without unduly moving CPI inflation off its low trajectory.

During the MPC meet, the RBI also highlighted developmental and regulatory policies that have been announced, which complement the monetary policy stance and action. These aimed at attracting and facilitating the flow of foreign funds into the country, more practical and pragmatic regulation of banks and NBFCs and proposals to enhance financial inclusion.

Overall, the MPC seems to have engendered a sustainably safer and more supportive monetary environment for businesses and consumers. All things considered, it appears that after a rather choppy financial year for businesses, on various fronts, the financial year is ending with some shorter term good news, in terms of lower rates, and longer term structure, in terms of developmental and regulatory policies, in the monetary policy space.

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