Monetary Policy: Feb Rate cut fair possibility!

During December monetary policy, majority of MPC committee argued in favour of wait and watch strategy to judge the path of unusually low food inflation and volatile crude oil prices. As discussed earlier  India experienced two positive surprises during Oct-December quarter. On one-hand crude oil prices slumped nearly 25% and food inflation collapsed, now posing a risk of agrarian crisis.

	5-Oct	7-Dec	15-Jan	Change Oct Policy	Change from Dec Policy
Crude Oil	84.16	61.67	59.68	-29.09%	-3.23%
Indian Rupee	73.8	70.8	70.9	-3.93%	0.14%
Nifty	10,261.00	10,693.00	10,834.00	5.58%	1.32%
India 10 year	8.02%	7.45%	7.47%	57 Bps lower	55 Bps lower
1 Year OIS	7.33%	6.75%	6.50%	58 Bps Lower	25 Bps Lower

Crude oil prices have remained below 63 handle while testing a low of 50.84. This softness in crude oil prices have eased fuel inflation to 4.54%, while comforting other macro-factors like fiscal and current account deficit. On other hand, December CPI inflation slumped to 18 month low of 2.19%. The decline in CPI inflation is led by deflationary food prices, which remained in negative territory for third consecutive month at -1.69%. Tracking these development, INR 1 year OIS swap has declined steadily from 7.33% in Oct to 6.50%.

Given this back-drop, there is fair possibility of interest rate cut by MPC on Feb-7. The risk to this view is worsening fiscal deficits at state and central level.