December monetary policy a close call

More than policy action, markets will closely watch RBI’s communication at this point

- TAMAL BANDYOPADHYAY

Those who were expecting a pre-Diwali gift from the Reserve Bank of India (RBI) in October were disappointed when the Indian central bank’s Monetary Policy Committee (MPC) left the policy repo rate unchanged at 5.5 per cent.

On December 5, when the MPC ends its three-day bimonthly monetary policy meeting, the last in this calendar year, will RBI Governor Sanjay Malhotra play the Santa Clause and bring an early Christmas?

After the status quo in two successive monetary policies of August and October, it will be a close call in December.

The growth-inflation dynamic always plays a critical role in formulation of the monetary policy for all central banks. From this perspective, the backdrop of the December policy is interesting as the consumer price index (CPI) -based inflation in October, at more than a decade low, creates space for a rate cut and, at the same time, the economy is on a firm growth path. The slipping of the rupee against the greenback adds another dimension, tilting the mood in favour of the status quo. But the central bank has been dropping hints on the space for a rate cut.

Gross domestic product (GDP) continues to surprise on higher side. India’s real GDP grew 8.2 per cent in the second quarter of the current financial year, surpassing the consensus estimate of 7.3 per cent. CPI-based inflation eased sharply to 0.25 percent in October from 1.44 per cent in September. The rupee, after breaching the 89 level a week ago, ended at 89.45 a dollar last Friday (November 28).

In October, the MPC noted that the growth outlook was resilient, supported by domestic drivers, despite uncertainties on the external front. It found the domestic structural reforms helping to somewhat offset the drag on growth from the weakening external demand conditions. The macroeconomic conditions and the outlook, the MPC noted, opened up policy space for further supporting growth.