RBI monetary policy today: Four things to watch out for

A security personnel member stands guard at the entrance of the Reserve Bank of India (RBI) headquarters in Mumbai, India, August 2, 2017.

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) is scheduled to announce its policy decision at 2:30pm on Wednesday. Given the rising risk of inflation overshooting the central bank’s target, the market is expecting status quo on policy rates.

All 15 economists surveyed by Mint expect the MPC to keep the key repo rate—the rate at which the central bank infuses liquidity in the banking system (or lends to banks)—unchanged at 6%.

Beyond the rate action, here are four things to watch out for in the monetary policy:

Inflation forecasts: Since the last policy rate cut in August, inflation, as measured by consumer price index (CPI)-based inflation has risen by 190 basis points to reach a five-month high. One basis point is a hundredth of a percentage point. The latest data showed CPI inflation quickened to 3.36% in August on higher food prices. Even core inflation, which excludes the volatile component of food and fuel, shot up sharply. Given the base effect during the second half of the fiscal year, economists expect inflation to jump further, breaching the 4% target in early 2018. Other risks, including the impact of monsoon on food price inflation, rising global crude prices and impact of goods and services tax (GST), could also push inflation higher.

Growth forecasts: Economic growth slowing to 5.7% year-on-year for the April-June quarter has sparked debate over the need to cut policy rates. The drop in GDP growth has shown that the impact of one-off events like demonetisation and GST implementation could play out much longer than expected. The six-member MPC is, therefore, expected to give a dovish outlook, acknowledging a slowdown in growth. Economists also expect the central bank to cut its current projection of real gross value added (GVA), a measure of growth, of 7.3% for the current fiscal year.

Commentary on government finances: As economic growth has been slowing for five quarters, the pressure is building on the government to announce a stimulus package to spur growth. Though the government has stuck to its budgeted borrowing target for this fiscal and also committed to meet the fiscal deficit target of 3.2%, it has not ruled out additional borrowing after a review in December. Total expenditure of the central government has grown at 7.5%, despite a muted growth in revenues at 2.1% during April-July 2017. The central government’s fiscal deficit has already touched 92% of the budget estimates. Economists expect the policy document to flag the issue of stretched government finances as it could be inflationary in nature. RBI governor Urjit Patel warned against farm loan waivers stating that they increase fiscal risks and pose an upside risk to inflation outlook.

Voting pattern: In the previous policy, four out of six members voted for a rate cut. This time too economists expect that the decision to keep rates on hold may not be unanimous. Ravindra Dholakia, one of the three external members of the MPC, who is perceived to be an eternal dove, is expected to press for further easing, while Michael Patra is expected to stick to his hawkish stance.

 

 

[“source=hindustantimes”]