RBI Monetary Policy Decision Today: 5 Things to Watch Out For

RBI governor Urjit Patel. Photo: Mint

Mumbai, India, June 6, 2018//- After an unusual 3-day long deliberation, the Reserve Bank of India’s (RBI) monetary policy committee (MPC) is set to announce its decision on key policy rates today.

While the majority of economists surveyed by Mint expects the MPC to hold the repo rate at 6%, with the central bank signalling the withdrawal of an accommodative policy, a minority is not ruling out the probability of a rate hike in today’s policy. RBI will announce policy decision after 2.30pm. Here are five things that might be on the radar of the monetary policy committee:

Policy action: Even as the market expects status quo, there are three likely scenarios that can emerge from today’s policy.

First RBI could maintain a pause in policy rate with change in stance from neutral to hawkish, signaling that more rate hikes are imminent.

The second scenario is when the RBI could hike the policy rates, and lastly a rate hike followed by a hawkish stance.

Inflation: Since the last policy retail inflation has accelerated to 4.6% in April, after dropping to 4.28% in March and 4.4% in February.

Core inflation also quickened for six successive months to 5.9%, a four-year high. RBI’s own forecast shows CPI inflation to quicken to 4.7-5.1% in the first half of this current fiscal year and thereafter slow down to 4.4% in the second half.

The upside risks to this inflation path is rising crude prices, depreciating rupee, minimum support prices and impact of house rental allowance.

Given these risks, some economists are not ruling out a further upward revision in the inflation outlook while it remains certain that the MPC is likely to change its policy stance from neutral to hawkish.

Dissent: The April policy saw RBI deputy governor Viral Acharya’s clear indication that in all probability his next vote will be for a rate hike.

Chetan Ghate had also flagged off concerns over rising inflation and structural risks to inflation. Assuming that Acharya and Ghate along with Patra vote for a hike and the other two members—Pami Dua and Ravindra Dholakia—opt for status quo, the final casting vote will be with the governor. The market will closely watch out for any such signals.

Global factors: Emerging markets are facing a dollar liquidity shortage due to the combined effect of US Federal Reserve unwinding its balancesheet and a substantial increase in US government borrowing.

RBI governor Urijit Patel in an opinion piece in Financial Times had warned that the Fed must slowdown the pace of trimming its balancesheet in order to avoid a crisis in the dollar bond market.

Rupee has already weakened by 3.2% in the last 2 months, and has crossed 68 per dollar. The recent depreciation in the rupee has intensified mainly because of a sharp rise in international crude oil prices and negative foreign portfolio flows.

The MPC’s commentary on these global factors and its impact on policy trajectory will be keenly watched.

Banking sector issues: Besides future policy cues, market will watch out for RBI governor’s commentary on the current state of banking.

His views on performance of public sector banks and cleaning up of bad loans will be carefully watched.

For the fiscal year 2017-18, 22 public sector banks made a cumulative loss of Rs85167 crore. It’ll also be interesting to see if governor has a view on the corporate governance issues surrounding ICICI Bank.






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