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Business News/ Politics / Policy/  RBI’s interest rate decision: What to watch and how to read the monetary policy
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RBI’s interest rate decision: What to watch and how to read the monetary policy

RBI is expected to keep policy rate unchanged at 6.5%, but the policy statement and the commentary that follows will be key to future actions

The Reserve Bank of India (RBI) has already reduced rates by 150 basis points since the start of 2015. Photo: Aniruddha Chowdhury/MintPremium
The Reserve Bank of India (RBI) has already reduced rates by 150 basis points since the start of 2015. Photo: Aniruddha Chowdhury/Mint

The Reserve Bank of India (RBI) will announce its monetary policy review at 11am on Tuesday. The central bank, which now reviews interest rates every two months, is expected to keep its benchmark policy rate unchanged at 6.5%, having already reduced rates by 150 basis points since the start of 2015.

The policy rate

A poll of 10 economists conducted by Mint showed that no one expects a rate cut this time around as RBI attempts to bring down inflation to below 5% by March 2017. With consumer price inflation (CPI) quickening to 5.39% in April and wholesale inflation turning positive, the central bank may choose to wait and see whether the jump in inflation was temporary. Not everyone believes it is. Read the story here.

The guidance

If RBI chooses to keep rates unchanged, watch to see whether it maintains that its monetary policy stance remains “accommodative" and that it will use “available room" to cut rates further. If these key phrases are missing from the policy statement and the commentary that follows, it will suggest that the rate cutting cycle is at an end.

The liquidity framework

RBI will also likely provide an update on its revised liquidity framework and questions will be asked on why bond yields and market interest rates have not corrected despite the promise of easier liquidity. Any indication that the liquidity deficit will be wiped out quicker than earlier anticipated could lead to a correction in market rates. More on this in this story.

Bank bad loans

Apart from monetary policy, RBI will share its perspective on the clean-up of bad loans in the banking system. Banks have taken most of the hit from the regulator’s asset quality review (AQR) in the second half of fiscal 2016. The AQR has left banks holding more than Rs5.7 trillion in bad loans. Lenders have now suggested a stressed asset fund sponsored by the large funds, which can help take some of these off the books of banks. RBI’s views on this will be awaited and if it supports the creation of such a fund, banks will be relieved.

FCNR outflows

The currency markets will also look for clarity on how well prepared RBI is to handle the redemption of foreign currency non-resident (FCNR) deposits that will come up for redemption starting September. While RBI has tried to assure markets that they are adequately covered in the forwards market, there is fear of volatility. Some analysts expect that RBI may leave a window open for rollover of these deposits. Read here.

Raghuram Rajan’s tenure

Raghuram Rajan’s tenure comes up for renewal in September. So far, the governor has maintained a stoic silence on the renewal of his tenure. The pitch of the debate on the issue, however, has become shriller over the past month. Will Rajan say anything to quieten the debate? Markets are watching.

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Published: 07 Jun 2016, 07:32 AM IST
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