Feb 07 2019

Populist Policy?

We have heard of populist budget in the election year; is this the populist policy in election year? This year’s first and Governor ShaktikantaDas’s maiden policy review, saw RBI cutting its Repo rate by 25 bps, much against the majority expectation of a status quo.  While broad expectation was a change in stance from calibrated tightening to neutral – this is inline with global rate sentiment currently and almost comforting inflation numbers internally – a rate cut seems like an eager governor looking to please the Government in election year.

Governor Shaktikanta Das replaced Urjit Patel, who mysteriously moved out of his office ahead of time, accounted for one of the 4 officials who voted for a rate cut while 2 officials (including Viral Acharya) voted against. Core inflation has been encouraging and the headline inflation has been moving in the right direction though not yet in the zone of comfort. Coming in the wake of populist budget announced last week, this rate cut seems a little ahead of its time.

I am personally happy with a rate cut.  Credit offtake has not been encouraging, growth could do with a bit of help from RBI and overall spending will get a boost. But all that is macro gyan.  Proposed sops (budget) already point to an inflationary environment, though nothing comes into serious play until election.  There have been serious doubts on fiscal deficit target too. Given this, overall expectation from RBI was a change in stance and no action on the rate front.  This would have given two more months of data before the next MPC and decision thereof.

Would we have been disappointed if there was no rate cut? Maybe.  Would we have found the Governor tepid if he was in line with market expectation? Does his action need cheering for going ahead and giving growth a boost? If it wasn’t the election year, would we have called this a bold and much needed decision? In an election year, we tend to see everything through colored lenses.

Welcome to the party!