5 things to watch for at RBI monetary policy meeting today
With the market expecting RBI to hold the repo rate at 6.5% at the monetary policy meeting today, a look at the five things that could be on the MPC’s radar
Following a three-day meeting, the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) will announce its policy decision today. With the market expecting RBI to hold the repo rate at 6.5%, Mint takes a look at the five things that could be on the MPC’s radar.
What could be RBI’s likely rate action?
The monetary policy committee is expected to keep the repo rate on hold due to the fall in crude oil prices and lower-than-expected inflation. Treasury heads of 10 banks surveyed by Mint said the RBI repo rate would be maintained at 6.5% and the policy stance would remain “calibrated tightening”. Moreover, the central bank had said in its October policy that a rate cut was off the table. RBI governor Urjit Patel had said calibrated tightening essentially meant that during this cycle, a rate cut would not be considered and that the central bank was not bound to increase rates at every policy meeting.
Will RBI change its outlook on inflation?
In its October policy, the monetary policy committee had pegged inflation at 4% for the second quarter of FY19, 3.9-4.5% for the second half of the fiscal and 4.8% for the first quarter of the next fiscal, with risks to the upside. However, headline inflation, as measured by the consumer price index (CPI), for October came in below RBI estimates at 3.31%.
Bankers expect the central bank to revise the inflation trajectory downward by 10-20 basis points (bps). That apart, crude oil prices have slipped 25% to below $60 a barrel since the beginning of October. This could comfort MPC, given that falling crude prices ease import pressures.
Will RBI lower the cash reserve ratio for banks?
Some experts say RBI could cut the cash reserve ratio by 50bps, given that it has remained unchanged since 2013. This may inject nearly ₹65,000 crore of liquidity into the system.
How will RBI address the India liquidity crisis?
RBI has undertaken open-market operation (OMO) purchases of over ₹1.3 trillion this fiscal, with another ₹40,000 crore lined up. The system liquidity deficit has been shrinking and was at ₹40,000 crore as of 30 November. Since the monetary policy committee meeting follows the 19 November RBI board meeting, the stock market will be closely watching how the central bank addresses the liquidity problems of non-banking financial companies (NBFCs). The central government has also been pushing for a liquidity window for NBFCs.
Will RBI change its liquidity stance?
Bankers and economists say RBI will not change its neutral stance on liquidity. Under this, RBI aims to keep the call money rates closer to the repo rate. It said in October that systemic liquidity alternated between surplus and deficit during August-September. RBI had added that liquidity adjustment facility operations absorbed ₹3,000 crore in August, on a daily net average basis, but injected ₹40,600 crore in September, and the weighted average call rate traded below the repo rate by 15 bps in August and 4 bps in September.
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