Mumbai: After two days of deliberations, the Reserve Bank of India’s six-member monetary policy committee is scheduled to announce its policy decision at 2:30pm on Wednesday. While the committee is likely to keep the policy rates unchanged, it is expected to highlight the risks to its policy trajectory from rising inflation and higher fiscal slippage.
Here are the four things to watch out for in the monetary policy.
Rate action: Fourteen of the 15 economists surveyed by Mint expect RBI to keep the repo rate—the rate at which the central bank lends to banks—unchanged at 6%. One economist expects a 25 basis point hike. One basis point is a hundredth of a percentage point. Most economists, however, expect RBI to sound hawkish, hinting at a possible rate hike in FY19. A combination of factors, including rising oil prices, fiscal slippage and impact of higher support price for the farmers, is likely to influence RBI’s policy decision.
Inflation: In the December monetary policy, RBI had raised its fiscal second half inflation forecast to 4.3-4.7% from 4.2-4.6%. But retail inflation, as measured by the Consumer Price Index (CPI), touched 5.2% in December as vegetable and fuel prices hardened. Rising oil prices, lingering impact of rise in house rent allowance, as part of the 7th Pay Commission, and an expansionary budget are likely to keep future inflation prints elevated. Additionally, some economists are also pricing in potential impact of the budget announcement to allow minimum support price (MSP) of kharif crops 50% higher than the cost of production on inflation. RBI is, therefore, likely to raise the inflation forecast for next year.
Growth: In the last policy, FY18 growth projection was kept unchanged at 6.7%. RBI could peg the growth estimate for 2018-19 at 7-7.5%. Most research houses are penciling a strong recovery beginning in the fourth quarter. Non-food bank credit increased by 10% in December as compared with 4% growth in the same period last year. Recapitalisation of public sector banks may help improve credit flows further.
Comments on domestic fiscal situation: The government revised the fiscal deficit target for FY18 to 3.5% of the GDP and FY19 to 3.3%. Economists expect an upside risks to fiscal deficit next year, given the ambitious growth projection on tax revenue and higher government spending ahead of elections. Rising oil prices could also add to the fiscal deficit burden, resulting in higher government borrowing. RBI’s statement on fiscal deficit will, therefore, be keenly watched.