BackRBI monetary policy meeting: 3 things the market is keenly watching
From RBI's estimation of growth and inflation, to its move on cash reserve ratio, the market is closely watching for the monetary policy statement
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Mumbai: As the Reserve Bank of India’s (RBI) monetary policy committee starts its two-day meeting on Tuesday, the market has already factored in a 25 basis points (bps) cut in repo rate. However, the tone and tenor of the committee on the impact of demonetisation and its view on the external sector post Donald Trump’s win will be key in deciding the future course of monetary action.
Here are three things that the market is keenly watching for in the policy statement.
Growth and inflation: The government’s clampdown on high-value banknotes on 8 November has disrupted the cash-dependent supply chain of many firms, prompting economists to slash economic growth estimates for this year by as much as 330 bps.
One bps is one-hundredth of a percentage point.
The rural economy which was expected to revive after what was a normal monsoon, has also been hit due to the government’s demonetisation drive. While there is no doubt that growth has been hit in the short term as is also evident from the November PMI index which fell compared to the previous quarter, the market wants to know how much drag the RBI is estimating.
Also read: Open letter to Urjit Patel
On inflation, the expectation is that it will remain subdued due to depressed demand. However, the chances of a spike in inflation owing to delay in sowing of rabi crops is not ruled out. Hence RBI’s projection of inflation trajectory will be another key factor to watch out for.
External situation and fiscal deficit: The rupee has weakened 2.41% since 8 November, with Donald Trump’s win in the US presidential elections and a near-certain interest rate hike by the US Federal Reserve this month, prompting investors to flee to dollar assets. In this context, market participants would be interested to know how much will the Fed action affect India and the central bank’s rate action.
Also read: Dear monetary policy committee, it is time to talk to the public
On the fiscal deficit front, the market is looking for clarity on how the RBI will treat the proportion of cancelled notes which does not get reported back and if there is a possibility of a fiscal bounty in the form of a higher dividend.
Liquidity: Banking system liquidity which was in surplus after the government announced demonetisation fell to neutral after the RBI asked banks to keep 100% cash reserve ratio (CRR) on incremental deposits. The central bank also increased the limit to issue bonds under the market stabilisation scheme up to Rs6 trillion. The market is closely watching if the RBI will relax the CRR beyond the deadline of 9 December and how much of the incremental deposits it expects to stay in the system.
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