After a three-day deliberation, the Reserve Bank of India’s monetary policy committee (MPC) will announce its policy decision today. The decision is crucial, given the rupee’s rapid plunge and stock market volatility. Mint takes a look at five things that could be on MPC’s radar.
What is likely to be RBI’s policy action and stance?
Out of the 15 economists that Mint interviewed, 14 expected the central bank to increase the benchmark repo rate by 25 basis points to 6.75%, given surging crude oil prices and a rupee depreciating almost on a daily basis. One among them, however, was of the view that RBI may consider a 50 basis point hike, besides changing its stance to hawkish. A majority of economists also expect at least one more rate hike in 2018-19, most probably in the December policy review of the central bank, unless there is a reversal in crude prices and the rupee strengthens considerably.
Will RBI revise its inflation target?
Since the last policy meet, retail inflation has remained lower than RBI’s 4% target. Consumer Price Inflation (CPI) eased for the second straight month in August to 3.7% from 4.2% in July. Core inflation moderated, but remained high at 5.9% in August. RBI had revised its CPI projection for the second half to 4.8% from 4.7%. Economists say a revision in inflation target will depend on the impact of the rise in minimum support prices. The biggest threat to retail inflation is the pressure of importing crude, exacerbated by the rupee’s rapid depreciation. RBI will reiterate the risks from imported inflation yet again.
What is expected on financial stability?
The MPC statement may include its assessment on the turmoil in the credit markets brought about by the liquidity crunch at Infrastructure Leasing and Financial Services Ltd.
What are the external factors that could influence the committee?
Considering the threat to inflation emanates from imports and a weak rupee, RBI may explain its assessment on the balance of payments. The current account deficit widening to $75 billion poses a risk to RBI’s inflation mandate. The rupee’s depreciation has exceeded the taper tantrum of 2013. Much of the volatility is due to hostility towards emerging markets, including India. So, RBI may offer succour on that front and flag its implications for the home economy.
Will RBI revised it liquidity stance?
RBI may reiterate its neutral stance on liquidity. Since September, it has stepped up its liquidity infusion programmes after liquidity deficit touched ₹ 1.5 trillion. Last month, it conducted two open market operations followed by announcement to conduct a bunched-up bond buyback plan worth ₹ 36,000 crore in October. It also allowed an additional carve-out from the statutory liquidity ratio kitty of banks that may be used to meet liquidity coverage ratio needs.