RBI Turns Dovish

Could this be a signal for an impending rate cut?

The RBI monetary policy announced on June 07th maintained status quo along expected lines. But focusing purely on the rates would be missing the bigger picture. There are four key takeaways from the policy which point towards a more dovish stance from the RBI…

Finally, there is dissent…

For a group consisting of academic heavyweights, there was a surprising degree of consensus in previous meetings of the Monetary Policy Committee (MPC). For the first time, one member of the MPC, Dr. Ravindra Dholakia, has taken a more dovish stance and dissented with the decision of the MPC to maintain status quo on rates. Of course, the majority of 5 members still voted in favor of status quo but the fact that members are beginning to think in terms of rate cuts is itself a positive signal.

Lowering inflation targets…

The RBI in its June review has clearly reduced its inflation targets for the current fiscal year. In fact, for the first half the expected inflation stands reduced by 100 basis points while for the second half the expected inflation is down by nearly 50 basis points. A lower inflation trajectory is a clear indication that the RBI is willing to consider rate cuts in the coming policies. While the quantum of cuts is still not too clear, the actual rate cuts may happen soon.
Bond yields are hinting thus…

The best indicator of a likely rate cut by the RBI is the preparatory movement in bond yields. In the aftermath of the RBI policy, the benchmark 10-year bond yields were down by 8-10 basis points. The bond markets are looking at this policy as an indication that the Monetary Policy Committee (MPC) may seriously consider reversing its monetary stance from “Neutral to Accommodative” once again. It may be recollected that the MPC had shifted its monetary stance from Accommodative to Neutral in the February meeting and had reinforced it in the April meeting. The bond markets are clearly betting on this stance changing in the August policy meet.

No hawkishness in the tone…

One of the key differences between the previous two monetary policies and the current policy is the virtual lack of hawkishness in the tone of the MPC. In the previous two MPC minutes, there were warnings from no less than the RBI governor that markets need to be prepared for rate hikes. While the minutes will be out only on 21st June, the tone of the RBI is quite clear that it has given up its hawkish tone. Even the status quo in this policy is entirely conditional and RBI has almost hinted at a rate cut if the inflation does not really spurt. With IMD predicting monsoons at 98% of FPA, it looks like the rate cut may happen sooner than later!