RBI has one less thing to worry about this credit policy - thanks to lowering crude oil prices

  • RBI is expected to maintain its status quo and leave interest rates unaltered.
  • In December, CPI inflation spiked to an unexpected five-year high of 7.35%.
  • Macroeconomic indicators like index of industrial production (IIP) and core sector performance are showing an uptick.
  • Manufacturing PMI is scaling to a near eight year high of 55.3 in January 2020.
India’s central bank has been more than generous last calendar year while setting its base rate. It cut its repo rate - the rate at which it lends to banks - by five times, consecutively. This credit policy however, is expected to maintain its status quo and leave interest rates unaltered like it did in its last and final policy of 2019.

In December, CPI inflation spiked to an unexpected five-year high of 7.35%. This inflation pushed by vegetable prices had gone beyond the upper band of RBI’s expectations. Consequently, it has become wary of taking chances.

A crude awakening

When it cut its rates five times last year, it was cushioned by benign inflation rates. Inflation of food and non-food items both can be affected if the Reserve Bank of India (RBI) decides to release liquidity into the system by tinkering interest rates. Since it was low, it had the option to cut its rates. All this changed last month.

However, the spike in inflation seems to be coming down. Since India is a net exporter of crude oil, the scare of a possible war like situation has kept economists on the edge. However, that worry has passed and crude oil prices fell to $55 a barrel - and inflation is subdued yet again.

In spite of this, the RBI is expected to keep base rates unchanged at 5.15%. For one, its endgame has been achieved. “The previous rate cuts were transmitted by the banks to borrowers as evident from the low marginal cost in banks lending rates,” said a report by Brickwork Ratings. This is an effect of the many rate cuts and though slow banks have started transmitting them to their borrowers.

A job well done

The need for the central bank to push for growth might be reducing. Due to various government stimuli, many macroeconomic indicators like index of industrial production (IIP) and core sector performance have improved.

“This, coupled with manufacturing PMI is scaling to a near eight year high of 55.3 in January 2020, growth is likely to rebound next fiscal. We expect GDP growth of 5.5-6% in 2020-21,” said Brickwork Ratings report.

This forecast is much lower than what the government’s economic survey has predicted India’s GDP growth to be - at 6-6.5%. If that is achieved, then the RBI might not have to stress itself with the job of halting India’s massive slowdown.
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