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Business News/ Market / Mark-to-market/  RBI policy: Waiting for wild card entry in a scripted play
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RBI policy: Waiting for wild card entry in a scripted play

The Union budget could well be the wild card that would tilt the monetary policy committee towards an interest rate hike

The Reserve Bank of India (RBI) has seen all its forecasts come true on the macroeconomic front. Photo: Aniruddha Chowdhury/MintPremium
The Reserve Bank of India (RBI) has seen all its forecasts come true on the macroeconomic front. Photo: Aniruddha Chowdhury/Mint

Rise in retail inflation? Check. Surge in global commodity prices? Check. Improved domestic economic growth recovery? Check.

The Reserve Bank of India (RBI) has seen all its forecasts come true on the macroeconomic front.

The anticipated firming up of retail inflation as well as core inflation has played out. Consumer Price Index (CPI) inflation quickened to 3.58% in October from 3.28% in September. Global commodity prices have been moving up with renewed vigour. Brent crude oil is now close to $64/barrel, a more than 10% surge in just two months.

The domestic economic growth data reflected all the signs of the tentative pick up the economy was expected to show. Gross value added (GVA) rose 6.1% for the September quarter, compared with 5.6% in the previous quarter.

In a rare occurrence, the central bank has also gotten most of its wishes fulfilled. In October, RBI had called for recapitalizing public sector banks and simplification of the goods and services tax (GST) in order to create the enabling conditions for revival of investment demand. The government has since then addressed all the concerns over solving the twin balance sheet problem by announcing a Rs2.1 trillion bank recapitalization plan and making the Insolvency and Bankruptcy Code (IBC) stronger. The teething problems of GST have also been fixed.

So the question of whether RBI will tinker with rates on Wednesday is moot, given no surprise elements.

However, there is one joker in the pack—fiscal slippage. Given that the government has already reached 96% of the budgeted fiscal deficit, any push towards large public spending would result in a breach of the 3.2% fiscal deficit budgeted for the current year.

The prospects of this happening are already strong, given the trend in revenue collections after GST.

Another uncomfortable fact is that the budget for fiscal 2019 would be the last full one of the current government as national electoral polls are slated to begin in 2019.

Therefore, measures would be more prone to be wearing a strong populist shade, making it easier to abandon fiscal frugality.

A peek on where policy rates are headed was given by Michael Patra, the executive directly in charge of monetary policy at RBI, in the minutes of the October monetary policy committee meeting.

Patra warned that the time has come to be ready to raise the policy rate to quell the underlying drivers of inflation.

The budget could well be the wild card that would tilt the monetary policy committee towards a hike.

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Published: 04 Dec 2017, 07:58 AM IST
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