RBI Monetary Policy Meeting: Demonetisation, inflation likely to influence outcome

The six-member team began its monetary policy meeting (MPC) on Tuesday, amid growing expectations of a 25 basis point (bps) cut in the repo rate from the current 6.25 percent, to lift a sagging economy that is increasingly showing signs of a slowdown, thanks to demonetisation. 

Nomura, HSBC, DBS Bank, Edelweiss Broking and BofA Merill Lynch are of the view that the possibility of a rate cut is indeed high. 

The world, especially Asia, would be keenly watching RBI governor Urjit Patel's post-meeting statement. India accounts for about 14 percent of Asia's gross domestic product (GDP).

Two indicators for November — manufacturing and services — prove that the impact of the decision to ban high-value currencies is indeed a cause of concern.

The Nikkei India Manufacturing Purchasing Managers' Index, or PMI, dropped to 52.3 in November from 54.4 in the previous month, while the Services PMI plunged below the crucial 50-mark to 46.7. It is pertinent here that the Services PMI fell below the 50-mark for the first time since June 2015.

The combined effect resulted in the Nikkei India Composite PMI Output Index taking a bigger knock to fall to 49.1 in November from a 45-month high of 55.4 in October.

"MPC to note: US yields going up, India down, gap narrowing. Oil up, inflation pressure. EU political risk. ₹ wobble," Ajit Ranade, economist, tweeted on Tuesday.

DBS Bank
"Factoring in the soft high-frequency activity and inflation numbers in November, we expect the RBI monetary policy committee (MPC) to cut rates by 25bp when they meet this week. While lingering external uncertainties raise the odds of a no-move, the RBI MPC is likely to take a growth supportive stance to offset downside risks to growth from the demonetisation effort," Radhika Rao, economist, group research, DBS Bank, said in her Tuesday note.

BofA Merrill Lynch
"We expect the Reserve Bank of India (RBI) MPC to cut policy rates by 25bp tomorrow (and April) to combat the on-going demonetization shock with November inflation tracking 4 percent," BofA Merrill Lynch Global Research said in a note on Tuesday.

Edelweiss Broking
"At a time when global growth led by US is expected to see a marginal uptick, RBI may opt to stimulate the economic activity via loser monetary policy. This is expected to prod the central bank to support growth by reducing borrowing costs," it said in its analysis on Tuesday.

A softening inflation is also an enabler for the MPC to go for a rate cut. "The inflation trajectory which was primarily driven by food articles, as core inflation remained stable, continues to remain in a downward trajectory. Demonetization is expected to remove a part of black money, which by nature is inflationary. This should have a disinflationary impact which suggests that inflation for the month of November could fall towards the 3.5% mark. The upshot is for the MPC to opt for a reduction in interest rates to manage inflation-growth trade off," Edelweiss Broking added.

HSBC
"After the unanimous rate cut call in the MPC (monetary policy committee) and going through minutes of the meeting, we feel the RBI will go for another 25 bps rate cut in December review. However, we are not expecting for more rate cuts after December," HSBC's India chief economist Pranjul Bhandari said early last month.

Fitch Ratings
"Some central banks in the region may still find room for further monetary policy easing, given generally low consumer inflation. Further monetary easing is likely, for instance, in India, where inflation of 4.2 percent in October 2016 was below the intermediate target of 5 percent by March 2017 and within the medium-term target range of 4% +/- 2%," the ratings agency said in its note on Tuesday.