After the last two readings of inflation vindicated the Reserve Bank of India’s (RBI’s) policy stance and forecasts, it shouldn’t surprise that the markets and central bank watchers would now take a change in RBI forecasts with sombre resignation. And even embrace the absence of a rate cut in the wake of three-year-low GDP growth.

RBI left its policy rates untouched and raised its inflation forecast for the second half of fiscal year 2018 (FY18) marginally to 4.2-4.6% in its policy from the earlier 4-4.5% in August. But it pruned the forecast for gross value added growth sharply to 6.7% from 7.3%. Yet, rate-sensitive stock indices have gained—the Nifty PSU Bank index closed 0.57% up. Markets do strange things when there’s so much liquidity sloshing around.

The policy resolution statement and the accompanying monetary policy report give enough reasons for RBI’s caution.

The revised inflation forecast is backed up by a series of upside risks that the central bank has listed. Global geopolitical pressures on oil prices, rebound in vegetable prices and the all-important core inflation are some of the factors worrying RBI currently. The inflation expectations of households too seem to have ticked up for both three-month ahead and one-year ahead periods. And lastly, rural wages have been increasing steadily.

But topping the list of upside risks is the potential fiscal slippage that the central bank warns of. The accompanying monetary policy report suggests that the combined fiscal deficits of the states and the central government could potentially increase by 100 basis points owing to farm loan waivers. This could put considerable pressure on inflation. The report also went on to say that the impact of fiscal slippages is close to permanent on inflation.

This puts paid to any plans of the government for a fiscal stimulus to revive the flagging economy. RBI is not just reluctant to provide a monetary stimulus to growth but does not want the government to loosen its purse strings as well.

Indeed, the monetary policy report says that inflation will remain above RBI’s 4% target even at the end of FY18. It says: “For 2018-19, assuming a normal monsoon and no major exogenous shocks, structural model estimates indicate that inflation is expected to increase from 4.6% in Q1 to 4.9% in Q3 and then soften to 4.5% by Q4 2018-19 as the statistical impact of the central government’s HRA enhancement fades." In other words, if inflation plays out according to RBI’s current forecasts, there’s no scope for any further rate cuts till March 2019.

But why is RBI not worried about growth? For one, the central bank is confident that growth will pick up in the third and fourth quarters and signs of this are already visible in the latest Purchasing Managers’ Index data. To be fair, RBI believes that it would take not less than four -six quarters for corporates to deleverage and banks to put a dent in stressed assets—the two main reasons for the investment slowdown. That means that investment demand will take a longer time to revive. This corresponds with the fact that the central bank pruned its growth forecast.

Given that the growth slowdown stems from comatose investment demand, something that RBI can do little to revive with token rate cuts, and the fact that inflation is rearing its head everywhere, future rate cuts are almost out of the window.

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