RBI Monetary Policy: 9 key factors that will decide governor Shaktikanta Das' rate decision

It would be India’s sixth bi-monthly monetary policy for FY19, which will be presented for the first time by RBI’s new governor Shaktikanta Das in discussion with monetary policy committee (MPC). Markets, investors, experts and firms will be keenly watching the policy repo rate and monetary stance for India. For your information, several events have happened in the past few months with inflation reaching a record low and  persistent liquidity deficit which are witnessed in the banking system which was supported by the RBI. Majority of economists are predicting a status quo. However, few have still pointed out towards a repo rate cut picture for the first time in over an year. 

Currently, the policy repo rate stands at 6.50% with reverse repo rate at 6.25%; whereas marginal standing facility (MSF) rate and bank rate at 6.75% each. 

According to CARE Rating, with the credit policy coming up on Thursday, it becomes interesting to examine the situation of the Indian economy which will lead to the decision taken on rates by the MPC.

Thereby, here's a list of 9 key things that will surround near RBI's decision, as per CARE.

1.Bank deposits and credit growth 

The bank deposits at Rs 120 lkh crs have grown at 4.9% during Apr-18th Jan’19, higher than the 1.6% growth witnessed in the comparable period a year ago. The y-o-y growth at 9.7% has more than doubled compared with the corresponding period a year ago (3.8%).

The bank credit at Rs 93 lkh crs have grown at 8.2% during Apr-18th Jan’19, higher than the deposits growth at 4.9%. This has resulted in sustained liquidity deficit in the banking system.

During the current fiscal, credit growth has mainly been driven by personal loans (10%) followed by services (8.9%). Even though the credit growth to industry sector has improved vis-à-vis the previous year (-1.7%), it still remains low at less than 2%.

2. Fall in GSec yields

Benchmark 10 year GSec yield has declined from an average 7.40% during Dec’18 (since the last monetary policy) to 7.35% during Jan’19. OMO purchases undertaken by the RBI to the tune of Rs 1 lkh crs since the last monetary policy, softening of concerns over inflation with decline in crude oil prices and easing of retail and wholesale inflation aided the fall in the yields. 

The GSec yields rose from 7.28% on 31st Jan’18 to 7.38% on 1st Feb’18 on account of higher market borrowings budgeted and increased inflationary concerns following various announcements made in the Budget to boost consumer spending in the form of income support schemes, interest subvention and tax exemptions.

3. Liquidity Conditions

The banking system liquidity deficit (defined as all repo minus all reverse repo plus MSF) eased during the current week and moved into a surplus of Rs 0.5 lkh crs as on 4th Feb’19. 

The banking system has remained in liquidity deficit in 39 of the last 44 days (since the last monetary policy). The RBI has undertaken OMO purchases of Rs 2.37 lkh crs during the current fiscal and has announced its OMO purchases schedule of Rs 0.37 lkh crs for February’19.

4. Lower Corporate Bond issuances

Corporate bond issuances during Apr-Dec’18 amounted to Rs 4.0 lkh crs, 13% lower than Rs 4.6 lkh crs in the comparable period a year ago. Increase borrowing costs for the corporates following the increase in policy rates by the RBI and stress in the NBFC segment has led to lower corporate bond issuances. Also private investment has not yet picked up. 

The outstanding corporate bonds increased from Rs 27.4 lkh crs as of Mar’18 to Rs 29.5 lkh crs as of Dec’18 (a growth of over 7%).

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5. Commercial Paper Issuances

The commercial paper issuances increased by 17% to Rs 20.7 lkh crs during 1st Apr’18- 15TH Jan’19.

The outstanding commercial paper witnessed a substantial growth of over 40% during 31st Mar’18- 15th Jan’19, compared with 15% growth in the corresponding period a year ago.

6. Weakness in the rupee

The rupee has depreciated by 1% since the last monetary policy from Rs 70.4/$ to Rs 71.26/$. Factors including Volatility in the crude oil prices, sustained FPI outflows from the economy and geopolitical concerns over trade wars between U.S. and China have weighed on currency.

7. Sustained foreign fund outflows

The FPI flows into the Indian economy have witnessed a reversal in the current fiscal year (Apr-Jan’19) after registering an inflow in the comparable period a year ago.

Net foreign outflows from the Indian economy have been nearly $13.8 bn, in sharp contrast with the net inflow of $22.9 bn in the comparable period a year ago.

Shrinking global pool of investible surplus with the major central banks adopting for monetary tightening, weakness in the rupee, volatile crude oil prices and uncertainties over US-China trade war has resulted in these outflows.

8. Moderation in Inflation

Retail Inflation has eased during the year from 4.6% in Apr’18 to 2.2% in Dec’18 and wholesale inflation too has been moderating since the last two months on account of deflation in the food prices.

Although inflation is low, the core inflation continues to be sticky at around 5.5% that can be an area of concern for the RBI.

9.  Increase in borrowing programme

The government has budgeted for higher gross market borrowings at Rs 7.1 lkh crs (an increase of over 20% from the previous year) and net borrowings at Rs 4.7 lkh crs (an increase of 11%).

CARE have seen in the past that higher borrowings have not always resulted in increase in GSec yields (can be seen from the exhibit above). In fact, the average yields declined
from 7% to 6.9% during FY17-18 while net market borrowings increased from Rs 4.1 lkh crs to Rs 4.5 lkh crs during the period.

Economists at CARE finally said, "The RBI is likely to alter its monetary policy stance from “calibrated tightening” to “neutral” with inflation being lower than its target for 5 consecutive months but will maintain status quo in the repo rate given the core inflation being sticky at 5% and likelihood of build-up in inflation in the coming months on account of :

- Various announcements made in the budget to boost consumer spending in the form of income support schemes, interest subvention and tax exemptions.

- Higher effective MSPs can put pressure on food inflation.

- Likelihood of rise in oil prices - on account of possible supply cuts by OPEC members and removal of waivers granted by the US government on the Iran sanctions.

- Increase spending with general elections round the corner."