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RBI interest rate setting panel starts 3-day meet

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The 6-member Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, started three-day deliberations here today to decide on the key interest rate amid elevated oil prices and inflation hovering around 5 per cent. Experts are divided in their opinion about the likely action of Reserve Bank of India on the benchmark lending rate. While some said the central bank will maintain status quo on Wednesday, others did not rule out another rate hike.
The MPC is meeting for the third bi-monthly Monetary Policy Statement for 2018-19. The resolution of the MPC will be made public in the afternoon of August 1. RBI had increased the benchmark short term lending rate (repo rate) by 0.25 per cent to 6.25 per cent in its last policy review in June on inflationary concerns. The retail inflation, which is factored in by the MPC, spiked to a five-month high of 5 per cent in June on costlier fuel.
The government has mandated the Reserve Bank to keep inflation at 4 per cent (+/- 2 per cent). Experts also opined that the government's decision to substantially hike the minimum support price for Kharif crop will have adverse impact on inflation. While crude oil prices have come off the three year high, they continue to be volatile threatening inflation and current account deficit. In a research report, India's largest bank SBI said that the RBI may not go for another round of rate hike at this juncture.
"We believe August rate decision is a close call, though we believe status quo rather than a hike looks the best option," it said.The only reason for a rate hike by RBI at this juncture might be to "satiate the self fulfilling prophecy" of market expectations of a rate hike to stem the rupee depreciation (though rupee depreciated by 3 per cent post June), it added. In SBI's view, inflation risks are still evenly balanced.
While the MSP hike could statistically push up CPI by 73 basis points, such inflation is unlikely to materialise as it is purely subject to procurement by the central/state governments. Edelweiss Securities said: "In the upcoming policy review, we expect MPC to maintain its neutral stance while keeping the rates unchanged." Global financial services major DBS in a research report, however said RBI is expected to go for further rate hikes this fiscal, with the next increase in the August meet.
According to DBS, upside risks to inflation and a need to maintain financial markets' stability will keep monetary policy on a tightening bias. "We expect 50 bps more hikes in 2018-19, with the next likely in August," Radhika Rao, an economist with DBS said. Private sector lender HDFC Bank believes that the decision on rate hike is a "close call" for RBI, but its rate-setting panel will go for a status quo on key policy rates in the upcoming policy review meet. "It's a close call and a tough balancing act, but we expect RBI to tilt in favour of a 'hold'," its house economists said in a note.
The Business Standard, 31st July 2018, New Delhi

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