MPC, let the data lead you to the light

RBI's rate setting committee is having its next pow-wow next week. It's widely expected to remain focused on domestic inflation and growth in its October review, continuing with the pause on interest rate easing at its August meeting. Inflation is likely to trend lower with the pass-through of GST cuts, and boost to consumer spending during this festive quarter should prop up growth. The US Fed's cut earlier this month by 25 bps opens up policy space for RBI. But this could take the form of liquidity management over interest rate adjustment. Going into a transformative economic development like GST restructuring, the Monetary Policy Committee is likely to be led by data about its economic impact.

Monetary policy has been well synchronised with the government's tax stimulus, and the combined effect should provide the economy immunity against US tariff and H-1B visa shocks. There exists a reasonable chance that India and the US will come to an acceptable settlement over bilateral trade by November. If that is, indeed, the case, this could act as a much-needed tailwind for exports. Additionally, volatility in financial markets could subside, easing pressure on the rupee. One-off developments, both internal and external, will have to play out for a clearer picture to emerge for monetary policy. There remains scope for some more easing of interest rates. But that may get pushed further down in the financial year.

MPC had, in August, assessed that risks to inflation and growth were evenly balanced. It had observed an easing in global uncertainty and a stickiness in core inflation. A material change in its assessment would be needed for it to change its position from that of August. Inflation and growth projections for the current and subsequent quarters are likely to be revised with a downward bias for prices and an upward bias for GDP. This would strengthen the case for status quoists within MPC. Then again, RBI may use the opportunity to be more proactive in providing a facilitative monetary policy.