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Will MPC want to take ‘panga’ with markets one more time? Unlikely

Date: 06-02-2020
Subject: Will MPC want to take ‘panga’ with markets one more time? Unlikely
By Lakshmi Iyer

Yet again, there are butterflies rumbling through markets’ stomach as we approach the outcome of RBI Monetary Policy Committee’s policy review. At the last MPC meeting, the members unanimously voted for a status quo on interest rates when sections of market did have some hope of a rate cut. It seemed like RBI chose to focus on the headline CPI number and decided to wait and watch to see the impact of the past rate cuts.

Sixty days since then, one needs to ponder if anything much has changed from a macro /micro perspective. Calendar 2020 started off with the attack of novel corona virus in China –though the impact has been more pronounced in the past few weeks. Do financial markets really have to worry about the potential threat of an epidemic?

Well, it does seem like it. The impact of global demand as also supply in response to the virus outbreak remains unknown. However it is clear that continuation of this situation could lead to GDP growth estimates being slashed in China and maybe in some other parts of the globe too.

China has already announced some monetary measures to calm the nerves of their financial markets. It may not be surprising to see some other countries follow suit if this issue persists.

Closer home, we saw Union Budget 20-21 unveiled last week. The intent to walk the path of consolidation, albeit with small relaxation, was quite visible. The Finance Minister chose to expand the fiscal deficit for the current year FY20 and FY21 in a measured way (3.8% and 3.5%, respectively), which sounded like music to the ears of the bond market. Grief-stricken markets, which were mourning the spike in December CPI number past 7%, actually started partying post Budget announcement.

It was evident that while growth is a priority, there isn’t much inclination to spread the expenditure too wide, risking market wrath! We believe as RBI steps into the monetary decision making mode, it may not be able to ignore both these events – one offshore, one on the home front.

An additional music to the ear are food prices, largely led by the cooling off of onion, which means next few inflation readings may not be too threatening. Most commodity prices have actually softened in response to a riskoff sentiment, which also may not go unnoticed.

Given the above considerations, the MPC may well be tempted to maintain the accommodative bias, though it may choose to retain status quo one more time. It would be prudent to suggest to the markets that MPC is willing to act swiftly if the need arises to ensure that its actions do not act as an impediment to monetary transmission. The MPC may not want take ‘Panga’ with markets at least this time

Source: economictimes.indiatimes.com

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