RBI minutes suggest further loosening likely - Capital Economics
India Economics

RBI minutes suggest further loosening likely

India Economics Update
Written by Shilan Shah

The minutes of the Reserve Bank’s August policy meeting suggest that the MPC’s larger-than-expected rate cut was intended in part to send a dovish signal rather than simply being a case of “front-loading” loosening. This supports our view that further rate cuts are likely over the coming months.

  • The minutes of the Reserve Bank’s August policy meeting suggest that the MPC’s larger-than-expected rate cut was intended in part to send a dovish signal rather than simply being a case of “front-loading” loosening. This supports our view that further rate cuts are likely over the coming months.
  • The MPC voted to cut the repo and reverse repo rates for the fourth consecutive time at the conclusion of its policy meeting on 7th August. But the magnitude of the cut (35bp) was larger than those that preceded it (the previous three cuts had all been by 25bp). In total, the repo rate and reverse repo rates have both been slashed by 110bp this year, to 5.40% and 5.15% respectively.
  • The minutes of the meeting (released yesterday evening) suggest that the MPC is not done loosening policy yet. The minutes reiterate that the official policy stance remains “accommodative”. And rather than being a case of “front-loading” rate cuts as some had suggested, Governor Das explained that the decision to lower rates by 35bp was because “a reduction in the policy repo rate by conventional 25bp will be inadequate”.
  • In all, the emphasis is clearly still on looser policy. This supports our view that another rate cut is likely in this cycle, probably at the next meeting in October. Our view is that, having sent a dovish signal with a slightly larger-than-expected cut in August, the MPC will revert back to lowering rates by 25bp. Beyond October, the risks over the near term are skewed towards even more aggressive policy easing.
  • However, we continue to think that further policy loosening would be a mistake. Soft surveys such as the PMI readings have been upbeat (see Chart 1), while core CPI inflation rose in July. Meanwhile, the repo rate is already at its lowest since 2010, while there is a growing chance of fiscal slippage. (See Chart 2 and our Weekly, “Fiscal deficit target doubtful, banking code amended”, 2nd August.) Dr Chetan Ghate was the only MPC member to make note of this in the latest minutes.
  • Hanging over all of this is the fear that the independence of the RBI is being eroded – heightened by the surprise resignation of inflation hawk Dr Viral Acharya from the MPC in June. Our forecasts are relatively sanguine for now (see Charts 3 & 4), but there is a growing risk that inflation and interest rates will increase by more than we expect beyond the next 12 to 18 months.

Chart 1: Manufacturing & Services PMI

Chart 2: Central Gov’t Fiscal Deficit

Chart 3: Consumer Prices (% y/y)

Chart 4: RBI Policy Rates (%)

Sources: IHS/Markit, Ministry of Finance, CEIC, Capital Economics


Shilan Shah, Senior India Economist, +65 6595 1511, shilan.shah@capitaleconomics.com