Surprise monetary policy moves may become new norm in India

April 14, 2015

File photo of Reserve Bank of India (RBI) Governor Raghuram Rajan during a news conference in Mumbai

For all the measures India’s central bank has taken to increase transparency in policy making, predicting rate moves by Governor Raghuram Rajan is still difficult.

After two surprise rate cuts since January, both times outside of scheduled meetings, the chatter of another off-cycle easing has increased after data on Monday showed consumer inflation slowed unexpectedly to a three-month low in March.

A Reuters poll just before the December policy meeting showed a majority of economists expected the repo rate to be at 8.00 percent by the end of March. Only 2 in the sample of 38 predicted 7.50 percent — the present benchmark lending rate.

India has historically grappled with high inflation due to teeming demand from its vast population, large oil imports and weak farm infrastructure that led to massive wastage of crops.

But a 60 percent slump in global oil prices between June and January, cheaper food and an inflation-focussed central bank has knocked the wind out of price rises.

Consumer inflation has dipped steadily to 5.17 percent in March from almost 10 percent in December 2013, already below the Reserve Bank of India’s January 2016 target of 6.0 percent.

Still, up until two weeks ago, economists in a Reuters poll predicted the central bank would not move until its next scheduled policy review on June 2. But it may surprise again.

Devika Mehndiratta, senior economist at ANZ, said:

The RBI’s actions so far indicate a preference to front-load (rate cuts), and that, we think, suggests an inter-meeting action before the June meeting is a real possibility.

But predicting its moves has always been difficult.

The first repo rate cut in January was not such a surprise as Rajan had said he would act as soon as inflation cooled. But the second cut in March caught many off guard because he had said he would prefer to stick to the schedule.

After that, I think, people just accepted the fact that the RBI could move at any time. That is probably the reason why no one asked that question during the press conference thinking there may be no point in it.

A rate cut before the June review however depends on inflation cooling further.

While Monday’s data showed inflation was ebbing, another measure which strips food and fuel costs edged up slightly.

Also, torrential rains in the northern part of the country when it was supposed to be dry damaged much of the winter harvest, raising the possibility of a spike in food prices.

That suggests while the latest inflation print may comfort the RBI, it will probably wait for another round of data around mid-May before deciding on whether to move or not.

Shilan Shah, India economist at Capital Economics wrote in a note:

The data leaves the door open for further cuts to the repo rate, which has already been trimmed by 50 basis points to 7.50 percent this year.

There is a significant chance of the next 25 basis points cut coming in an unscheduled meeting before the review in June.

(With additional reporting by Shaloo Shrivastava)

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