Monetary Policy Committee meet begins, RBI likely to hold policy rate
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New Delhi: The Monetary Policy Committee, headed by RBI governor Urjit Patel, began its 2-day meeting on Wednesday amid experts saying that the central bank is likely to hold the rate on Thursday while unveiling the first bi-monthly review of 2017-18 in view of hardening inflation.
Rising interest rate in the US provides sufficient indication that benchmark policy rate of the Reserve Bank of India (RBI) is not going to go down but may increase in the future depending on domestic and external factors, experts said.
They were of the view however that RBI could announce some measures including standing deposit facility (SDF) to absorb additional liquidity in the system following demonetisation, announced on 8 November 2016.
According to various informal estimates about Rs14 lakh crore has come back into the banking system.
HDFC Bank chief economist Abheek Barua said RBI is likely to keep the repo rate unchanged in its upcoming monetary policy review. “In our view, the main focus of the central bank is likely to be on liquidity absorption in order to signal a neutral policy approach and for gaining additional headroom to intervene in the currency market,” he said.
This will be the fourth bi-monthly policy based on the recommendations of the 6-member MPC.
The government nominees on the Committee are Chetan Ghate, professor at the Indian Statistical Institute; Pami Dua, director, Delhi School of Economics and Ravindra H Dholakia, professor at IIM-Ahmedabad, while RBI nominees are the governor, deputy governor in-charge of monetary policy Viral A Acharya and executive director.
“I think that RBI will hold on to the interest rate in the upcoming policy,” Kotak Mahindra Bank vice chairman Uday Kotak told PTI. Going forward, he said, the tinkering could be plus or minus 0.25% depending on the evolving condition.
According to the head of another private sector lender, the central bank may not change rates on 6 April. In the last policy review on 8 February, RBI had kept key interest rate on hold at 6.25%.
Patel had said he would wait for more clarity on the inflation trend and impact of demonetisation on growth before making change in the key policy rate.
Wholesale inflation soared to a 39-month high of 6.55% in February while retail inflation inched up to 3.65% due to rise in food and fuel prices, leading to speculation that RBI will keep interest rate unchanged again in its April policy.
“Although the CPI inflation is likely to significantly undershoot the March 2017 target, we do not expect a repo rate cut in the upcoming policy review in April 2017, with the Monetary Policy Committee firmly focused on the medium term target of 4%,” rating agency Icra’s managing director Naresh Takkar said.
Crisil said that sharper-than-expected fall in inflation over the past few months has already started correcting as remonetisation gains currency and food price pressures could build anew if El Nino disrupts the south-west monsoon this year.
“To boot, core inflation, which has been sticky, could edge up if domestic demand. Given the predicament, we foresee CPI inflation averaging 5% in fiscal 2018, 0.3% higher than in fiscal 2017,” it said.
Monetary policy might have to clearly articulate the glide path to the 4% CPI target in the medium term, it said. Also, while fiscal policy and structural reforms, will be as crucial to quelling incipient inflation, it will take time for the benefits to work through an enduringly lower inflation,” it said.
Apart from the challenge of getting inflation down to 4%, which was flagged by the RBI Governor at the last review, one of the biggest factors influencing the analysts seems to be the shift in the policy stance to neutral.
“The RBI surprised with a shift to a neutral stance in February. Rates will remain on hold at April’s review,” analysts at Singaporean lender DBS said.
In Patel’s first policy review as RBI governor in October, which was also the maiden review of the MPC, the repo rate was reduced by 0.25% to 6.25%. Since then, the repo rate has been retained at 6.25%. However, RBI has cut repo by 1.75% since January 2015.