With one big macro event, the budget over, which left bond yields lower, all eyes are on the next big macro event that is the Reserve Bank of India’s (RBI) monetary policy on February 6, 2020. The policy is coming when growth is low, there is high food inflation and a restrained fiscal deficit.

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Dr Pronab Sen, former chief statistician, Soumya Kanti Ghosh, group chief economic advisor at State Bank of India (SBI), Sajjid Chinoy, chief India economist at JPMorgan, Samiran Chakraborty, chief economist at Citi and Sonal Verma, chief economist at Nomura as members of CNBC-TV18’s Citizen’s Monetary Policy Committee (MPC)shared their expectations from the upcoming monetary policy.

Verma said relative to December, the growth outlook hasn't changed materially. "As far as inflation is concerned, the uptick we have seen in food inflation implies that the RBI will have to significantly revise up its near-term inflation trajectory. The question is how durable is the food inflation spike that we are seeing outside of vegetables and to what extent one should be worried about higher food inflation resulting in inflation expectations moving higher."

“Our own sense is that there is some upward pressure in the food basket and food inflation will be higher this year. Overall, underlying demand side pressures still remain muted. On the global side, with the new concerns about Coronavirus will be a near-term growth hit and commodity prices have come-off, which should moderate some of the imported inflationary pressures," she said, adding that the budget being largely neutral for growth means that there is not a big growth or inflation push that is going to come from the budget.

"Therefore, I would say, while near-term inflation does look quite high, the risk of this spilling over into inflation expectations is quite low. On average, inflation actually is still going to be around 4 percent or below 4 percent for FY21. The underlying inflation, core inflation, still remains around 4 percent. Therefore, 12-month ahead inflation still is medium-term anchored around 4 percent despite the near-term spike. The bottomline is that growth moderation is a more durable concern, whereas inflation spike is more a transitory concern,” Verma said.

According to Ghosh, the budget has tried to do its best under the prevailing circumstances. "The fiscal situation continues to look worrisome because if you look into the fiscal deficit excluding the asset sales and the disinvestment receipts – has declined from 5.8 percent to 6.2 percent this year, that is the structural deficit. This year's deficit assumption is 3.8 percent factoring-in an income tax growth rate of 18 percent. For the next year, the deficit at 3.5 percent looks reasonable but you have to do a bottoms-up approach to understand the tax assumptions,” said Ghosh adding that some of the tax assumptions look aggressive, while some do not.

Speaking about growth-inflation mix Chinoy said, “I am little bit more constructive on growth in India compared to Ms Verma. If you look at the sequential momentum of growth, in the middle of last year it was tracking 3.5 percent annualised, in the fourth quarter it is tracking above 5 percent. So, one should not be fooled by the year-on-year (YoY) numbers but look at the sequential pick-up, the high frequency data is much more constructive - that is number one. Number two - if you look at the fiscal - I think there was a very fine balance between trying to be countercyclical without being counterproductive and if the government can execute assets sales - if they can do that then in fact the underlying fiscal impulse is meaningfully will be positive and that will also contribute to growth."

However, the big elephant in the room is what is happening globally. "We should not underestimate the shock in China. So, global growth in the first quarter could be meaningfully lower and that could hurt growth prospects in India. So, while domestic impulses are getting stronger you could have external headwinds,” said Chinoy.

On inflation he said, “The fact that crude is at USD 55 per barrel, is disinflationary, the fact that global growth will slow is disinflationary and this comes down to what Ms Verma said earlier, if you look at food - take vegetables out of the picture, the remaining which is 40 percent of the basket is growing at 5-6 percent, which we haven’t seen in many years. Now, is that durable or is that transitory will determine the inflation trajectory this year.”

When asked what monetary policy can do to help growth, Dr Sen said, “The problem is that at the moment the essential constrains on the Indian economy aren't being addressed. So, at best what monetary policy can do now is to prevent the system from slipping further downwards. It is much more a question of liquidity in the system, which the RBI should be looking at. How one plays that out is the question."

"If you look at the budget, what it suggests is that the nature of the problem continues to remain, which is a lot of entities outside of the central government are going to be stressed in terms of their liquid positions and that's the problem monetary policy has to consciously take on board because the fiscal policy hasn't done it for them. So, now the question becomes complex, in terms of what kind of liquidity are we talking about? This not the question of just this budget but of subsequent budgets from hereon. Are we talking about transitory liquidity or we are talking about further permanent liquidity injection, that to my mind is a critical question that the RBI faces,” Pronab Sen stated.

Chakraborty said, “The big question is that it is a situation where growth is still slow. I get Sajjid Chinoy’s point that there could be an incremental but we are bouncing back from such a low level that it is always difficult to feel comfortable with small bounces because structurally, it does seem like nothing much has changed on the growth front. So, the growth worry remains but at the same time the inflation situation although not alarming needs a careful watch."

"In that context for the MPC to have much space for rate cuts in my view is limited. The only thing that the MPC can try doing is to compress the term premium that is there. The fiscal has taken one good step towards that by not expanding the fiscal deficit too much. Now it is part of RBI’s job to ensure that this is supported as much as possible through some kind of unconventional monetary policy support,” Chakraborty said, adding that the growth support from monetary policy side can only come reduction in the term premium. Don't see support coming from actual reduction in rates.

First Published:Feb 3, 2020 11:45 AM IST