RBI monetary policy today: What to note beyond rate action
Mumbai: The Reserve Bank of India’s monetary policy committee (MPC) is likely to leave rates unchanged on Wednesday, given the concerns of rising inflation. All 15 economists surveyed by Mint expect the central bank’s monetary policy committee (MPC) to keep the key repo rate—the rate at which it infuses liquidity in the banking system—unchanged at 6% when it announces its decision on Wednesday.
Beyond the rate action, here are the three things to watch out for in the policy:
Growth & inflation forecast
With growth recovering and inflation rising, RBI’s outlook for the rest of the financial year will be closely watched. In the last policy, RBI had revised the fiscal year 2017-18 growth target down to 6.7% from 7.3%, citing adverse shocks, especially to the manufacturing sector, from the implementation of the goods and services tax (GST). But the latest GDP growth number for the quarter ended September has inched upwards to 6.3% after five consecutive quarters of deceleration, showing signs of recovery. The market therefore growth to accelerate in the second half of the year.
Since the last policy in early October, inflation as measured by Consumer Price Index has accelerated, inching closer to the 4% mark, which is the central bank’s medium-term target. The most recent inflation print in October saw headline retail inflation rising to 3.58%, the fastest pace in seven months, because of rising food and fuel prices. The prices of India’s crude oil basket rose to $61.60 per barrel at the end of November from $55.36 per barrel at the start of October, due to rising global crude oil prices. With CPI inflation expected to rise in the second half of the financial year, market expects RBI to sound hawkish in the bi-monthly policy statement.
With gradual rise in currency in circulation and pick up in credit off-take, liquidity situation is moving towards neutral from surplus mode. Market expects RBI to reiterate its stance of bringing systemic liquidity closer to neutrality, while using overnight and term repos under the Liquidity Adjustment Facility to manage liquidity in the near term. Additional open market operations (OMO) also seem unlikely, given the cancellation of the OMO sale last month.
Government finances commentary
The RBI is likely to reiterate its caution regarding the impact of fiscal slippages on inflation in the coming month. Given that the government has already reached 96% of the budgeted fiscal deficit, any push towards large public spending would result in a breach of the 3.2% fiscal deficit budgeted for the current year. While the government has committed to stick to the fiscal deficit target, there is uncertainty regarding the October indirect tax collection number post GST implementation.
Market also does not rule out the possibility of some populist measures in the February budget which will be the last budget of the current government before election year. The fiscal strategy adopted by the centre will therefore be of crucial importance. Further, state government budgets are under some stress and this could continue if states themselves implement their own pay commission recommendations and more states announce farm loan waivers.