Mumbai: The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) is set to announce its decision on key policy rates today. While the market expects the repo rate to be kept unchanged, RBI may signal withdrawal of its accommodative policy.

What is RBI expected to do today?

The majority of economists polled by Mint expect RBI to keep the repo rate unchanged this week, but anticipate a rate hike in the August policy. RBI, they think, will wait for more clarity on the monsoon and minimum support prices before taking a call. However, a few expect the central bank to hike the repo rate by 25 basis points on the back of high oil prices and rising inflation. That said, all of them expect RBI to sound hawkish, given that April’s headline and core inflation have crossed RBI’s medium-term target of 4%.

What impact do oil prices have on the Indian economy?

As the world’s third-largest oil importer, higher crude oil prices will adversely affect India’s fiscal and current account deficits, which in turn will have a spillover impact on consumption, monetary policy and investment behaviour. According to analysts, an increase of $10 per barrel in crude oil prices will lead to an adverse impact of $10-11 billion (or 0.4% of GDP) on current account deficit. The impact on inflation will depend on the pass-through effect of higher crude prices to consumers.

What else should one watch out for?

Besides future policy cues, the market will watch for Urjit Patel’s remarks on banking. His views on bank recapitalisation and bad loans will be examined.

How will markets react to the RBI monetary policy?

As RBI prepares to withdraw an accommodative policy, financial markets have already priced in higher borrowing costs. The 10-year government bond yield is up nearly 73 bps since the April policy, and is unlikely to react if RBI hikes rates. The rupee has weakened by 3.2% in the last two months and has crossed 68 against the dollar. The rupee’s recent depreciation has intensified mainly on a crude price rise and negative foreign portfolio flows.

One basis point is one-hundredth of a percentage point.

And what about consumers?

Banks have begun hiking both lending and deposit rates even before waiting for a signal from RBI. Taking a cue from the bond market, large banks such as State Bank of India, ICICI Bank and Punjab National Bank have raised their marginal cost of funds-based lending rate by as much as 10 bps each. If RBI indeed hikes policy rates on Wednesday, it could lead to a further increase in deposit rates, followed by lending rate hikes.

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