Mumbai: As the Reserve Bank of India’s Monetory Policy Committee meet is under way, all eyes are on the central bank’s stance on policy rates.
Hopes of RBI deviating from its hawkish approach are gripping the market sentiment as the government has been making a case for rate cuts.
However, a Mint poll that interviewed various economic experts revealed that the central bank is likely to hold the rates for now. Here are the five things that the MPC might be looking at in its second bi-monthly meet of 2017-18:
Repo rate
The RBI is likely to hold the lending repo rate at 6.25 per cent as it may want to take into account the inflation data for July after the Goods and Services Tax (GST) roll out, reported PTI. The central bank will want to keep a track of the inflation trend before it changes its position from accommodative to neutral.
It should be noted that between January 2015 and April 2017, weighted average lending rates slid by 169 basis points (bps), almost close to the 175 bps fall in repo rate in the same period.
Inflation
The Consumer Price Index recorded a new low of 2.99 per cent in the already waning inflation trend in April. This has given rise to the expectation of a more benign MPC stand on policy rates.
According to experts, GST and an expected good monsoon are likely to impact inflation and the CPI based reading. According to the Mint, the CPI reading is expected to be lower than the MPC mandated 4 per cent target.
Growth
The economy witnessed a sluggish fourth quarter growth with the GDP slowing down to 6.1 per cent. This might on the RBI’s radar as it decides whether to part from its hawkish tone on lending rates. Also, economists will keep a look out for what the RBI thinks of the effects of demonetisation on growth.
Liquidity
As excessive liquidity continues in India's banking system, experts believe no major announcement to drain liquidity will be made today. Banks have a liquidity pile up of $60 billion in the aftermath of demonetisation.
Clarity on the Standing Deposit Facility (SDF), which the RBI has been trying to introduce would also shed light on the gap between reverse rep rate and repo rate. In its April meeting, the RBI hiked the reverse repo rate—an instrument of draining out liquidity to 6 per cent. In the current surplus liquidity scenario, reverse repo rate is seen as the effective measure of policy rate.
