New RBI chief Shaktikanta Das looks likely to signal rate cuts

The Reserve Bank of India headed by a new chief, Shaktikanta Das, will probably drop its hawkish bias on Thursday, the first step toward a possible interest-rate cut this year as inflation drifts lower and the economy slows.

The repurchase rate will probably be kept steady at 6.5 percent, according to 32 of the 43 economists surveyed by Bloomberg as of Wednesday, with the rest expecting a 25 basis-point reduction. Real interest rates in India are among the highest in Asia, and calls for the first cut in the policy rate since August 2017 have been growing.

Das will have an opportunity to lay out his monetary policy outlook at a press briefing scheduled for 12 p.m. in Mumbai, shortly after the rate announcement. A career bureaucrat, Das is seen as more dovish on policy than his predecessor Urjit Patel, who quit in December following attacks on the central bank’s autonomy.

Under Patel, the RBI raised interest rates twice last year and stuck to a “calibrated tightening” stance in December. Das may shift that to neutral on Thursday.

Here’s a look at what else to watch out for in the statement:

Inflation Meltdown

Consumer prices rose 2.2 percent in December, the slowest pace in 18 months and below the RBI’s October-to-March forecast range of 2.7 percent to 3.2 percent. But core inflation -- which strips out volatile food and fuel prices -- has hovered around 6 percent due to elevated education and medical costs.

Das highlighted that difference in a recent speech, saying “such wide divergences and large volatilities in inflation across major groups pose challenges for inflation assessment.”

In its December policy statement, the RBI forecast headline inflation at 3.8 percent to 4.2 percent in the six months starting April, not very far from its medium-term target of 4 percent.

Growth Stutters

With headline inflation hovering at multi-month lows, India’s real interest rate makes it a standout in the region, and harmful to economic growth, according to analysts including Bank of America Merrill Lynch’s Chief Economist Indranil Sen Gupta.

High-frequency data already point to waning demand in the economy. The seasonally adjusted Nikkei India Services Purchasing Managers’ Index fell for the second straight month in January, indicating a softer expansion in output.

Automobiles sales -- a key indicator of demand both in rural and urban India -- are sluggish with consumption yet to recover from tight liquidity conditions spawned by a default at one of India’s largest shadow banks.

Budget Stimulus

The government’s expansionary budget -- including $13 billion in giveaways to help win votes for an election due by May -- complicates the monetary policy outlook. The stimulus may be inflationary, and is reason enough for the central bank to defer any monetary easing, according to some economists.

“We expect the monetary policy committee to vote 5-1 to keep the repo rate unchanged,” said Sonal Varma, chief India economist at Nomura Holdings Inc. in Singapore. “However, we expect the stance to change to ‘neutral’ from ‘calibrated tightening’, reflecting balanced growth/inflation risks.”