Mumbai: The Reserve Bank of India’s (RBI) monetary policy committee (MPC) is likely to keep policy rates on hold on Wednesday, amid falling crude prices, lower-than-expected food prices and moderation in economic growth, according to treasury heads of 10 banks surveyed by Mint. The treasurers were unanimous in their expectations that the repo rate, the rate which RBI lends to commercial banks, will remain unchanged at 6.5%, while it will maintain the policy stance at “calibrated tightening".

Since the last policy, when the central bank surprised the market by keeping rates on hold, crude oil prices have slipped below $60/bbl and retail inflation has eased to a 13-month low of 3.31%, below the medium-term inflation target of 4% for the third straight month. On the other hand, growth has slowed to 7.1% in the September quarter and factory output measured by the index of industrial production to 4.5%, giving enough reasons for the central bank to deliver a status quo policy this time.

With inflation expected to be below 3% for November, the market expects the next rate hike only in fiscal 2019-20. “The RBI is unlikely to change its inflation expectations as its estimates are already overshooting the inflation numbers," said Ashutosh Khajuria, executive director at Federal Bank. “I believe that the rupee will stay in the range of 69-71 against the US dollar, as it has a tendency to appreciate in relation to FPIs (foreign portfolio investors) investing in India."

In the previous policy, MPC had lowered its inflation trajectory to 3.9-4.5% and 4.8% for the second half of the current fiscal. However, it had flagged key risks to domestic prices from volatile global financial markets, surging oil prices and possible fiscal slippages in the run-up to elections—five states hold assembly polls before general elections next year. The treasurers expect RBI to revise the inflation trajectory downward by an additional 10-20 basis points on Wednesday.

While the market is unanimous on policy rates and RBI’s stance this time, it is divided on how the central bank will deal with the liquidity condition. The central bank has so far infused liquidity worth 1.36 trillion through the purchase of government bonds and is expected to infuse 40,000 crore more before the end of this fiscal. Despite these moves, the system liquidity deficit continues to remain around 1 trillion. With the government expected to tighten its purse strings in the months ahead to meet its fiscal deficit target, some expect RBI to either cut the cash reserve ratio or relax the statutory liquidity ratio (SLR) to ease the liquidity situation.

“Markets will watch out for stance on liquidity. The money markets have been in a deficit mode for weeks, as credit growth outstrips deposit growth and FPI inflows are muted," said Harihar Krishnamoorthy, head of fixed income, currencies and commodities at FirstRand Bank. “Any announcement of more OMOs (open-market operations) or relaxations on eligible SLR stock for LCR (liquidity coverage ratio) purposes or special refinance windows would be cause of cheer."

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