The RBI and the government do not have an acrimonious relationship but poll participants were split on the crucial issue of whether the government was right in calling the members of the monetary policy committee for a discussion ahead of the policy meeting. About 50% said that the government did the right thing, while an equal number said it was wrong on the part of the government to do so. Almost all participants said the MPC did the right thing by holding on to rates. The poll of 16 top fund managers was done on Thursday, a day after the government and the central bank sparred over the pace of rate cuts amid softening growth and dormant inflation. The monetary policy committee lowered the inflation outlook for FY18 but surprisingly did not cut rates.
The government’s chief economic adviser Arvind Subramanian hit out at the central bank for not reducing rates but the government was also heavily criticised for its decision to call members of the MPC for a discussion ahead of the policy meeting.
RBI governor Urjit Patel on Wednesday said the MPC members unanimously decided not to attend the meeting in an unusual, public assertion of independence. Finance minister Arun Jaitley termed the decision as an attempt by the government to give its views and assessment of the economic situation to the central bank.
The poll participants were divided on this issue with half believing that the government did the right thing. They said that the whole issue has been blown out of proportion.
The government only wants to interact and this does not mean that the MPC officials have to agree to everything the government said, the participants said.
The other half of the respondents who disagreed said the government should have called the RBI governor for a discussion instead of calling the MPC members.
“RBI does not necessarily abide by the government suggestions but can only listen,” said a head of treasury of a large foreign bank. “Actually, this is more of a personality fight between Urjit Patel and Arvind Subramanian whose styles of functioning are poles apart,” the person said.
About 12.5% of participants believe there will be no rate cuts this year. About 50% expect a 25% basis point cut, while 18.75% think the RBI will cut by 50 bps. An equal number believe that the cuts will be between 25 bps and 50 bps.
India’s retail price gauge has dropped to a record low of 2.99% in April, from a near-five-month high of 3.89% in March, because of base effect and lower food prices. This has fanned speculation of rate cuts as the government looks desperate to pull up the country’s growth.
The central bank changed its stance on credit cost from “accommodative” to “neutral” in the February policy and raised the reverse repo rate by 25 basis points in the April policy, a move earlier seen as a prelude to rate rise.
But, softer inflation has actually reversed the sentiment as people now expect a rate cut. “Markets always consider RBI’s views as final,” said Devendra Dash, head – asset liability management, AU Small Finance Bank. “The apparent rift between the government and the RBI interest rate is more optical. The authorities are unlikely to take any decision that spooks the market confidence.” “RBI’s dovish assessment of the recent economic data, if sustained, has rekindled hopes for a rate cut in the second-half of FY18,” said Dhawal Dalal, CIO – fixed income, Edelweiss Finance. “This development is bullish for government bonds in the current ‘goldilocks’ type macro-economic backdrop.”
“We will watch carefully in next few months the incoming data on inflation as well as real indicators of economic activity. I expect that we will remain adequately state contingent and if data so warrants, then act for a broader accommodation through interest rate policy, said Viral Acharya at a post policy press conference.