More dovish, we should add, for reasons already discussed — like the acceptance of a higher inflation threshold, the lowering of the real rate target, and the fact that the cut of 25bps in early October was on the back of a unanimous vote from the newly formed MPC under its new governor, Urjit Patel.
But more on that below the break.
First, that chart from Goldman based on the (now ex-Rajan) Reserve Bank of India’s recently released minutes:
We’d note that Chetan Ghate did actually express some nerves about core inflation too — its “persistence… remains a concern” — but the short summary from Goldman seems accurate, that “the MPC members seemed more comfortable with the inflation outlook in the near term while remaining cautious on the growth recovery.”
Btw, the broad reason people are a bit nervy about the inflation scenario is, per SocGen’s Kumar Kundu, that favourable base effects will dissipate by the end of 2016, things like increasing salaries for government employees have to be taken into account, and “even the RBI accepts that its target of 5% headline inflation by March 2017 will be breached on the upside.”
The RBI’s own analysis suggests that the progress of the disinflationary trend will be much slower than expected. As a result, the RBI has decided to shift its expected date of achieving the 4% yoy inflation target from March 2018 to as far out as March 2021 by which time Patel may no longer be the governor unless his term is extended by another two years, unlike [the recently departed Raghuram] Rajan.
Meanwhile here’s Nomura’s Sonal Varma on the dovish related questions that still need answering despite the minutes:
The missing issues
In our view, the minutes left several key questions unanswered. First, there was no published discussion among the MPC members on the neutral real rate for India. This was one of the key changes at the policy meeting as Dr Michael Patra stated in the post policy conference call that with neutral rates falling globally, India’s neutral real rate should also be lower at 1.25% versus 1.5% earlier. Second, the minutes did not provide any insights into the timeline within which the members expect to achieve the mid-point 4% of the mandated inflation target range of 4%+/-2%. Third, there were no details on the MPC members’ inflation outlook beyond March 2017.
What can we conclude?
In our view, the minutes revealed that the majority of the members were focused on the recent improvement in food price inflation, rather than on sticky core inflation or the medium-term trend. The minutes do not offer any forward guidance on the stance or the timing of the cut, but because of the recent lowering of the neutral real rate and no clear time commitment to the 4% target, we expect the RBI to cut rates again by 25bp in February 2017.
The minutes themselves are here.
The increased expectations of another 25bps cut — probably early next year — are everywhere.
Why has RBI settled for a lower neutral interest rate? Mint
India’s not-so-new central banker – Mihir Sharma
And, India’s central bank grows up – Mihir Sharma
Your shorter (but more detailed) Rajan replacement cheat sheet – FT Alphaville
Raghuram Rajan: “I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016″ – FT Alphaville