RBI monetary policy
What to note in RBI monetary policy beyond rate action
RBI’s monetary policy committee is likely to leave rates unchanged on Wednesday. Here are three things to watch out for in the policy beyond the rate action. The Reserve Bank of India’s monetary policy committee (MPC) is likely to leave rates unchanged on Wednesday, given the concerns of rising inflation. All 15 economists surveyed by Mint expect the central bank’s monetary policy committee (MPC) to keep the key repo rate—the rate at which it infuses liquidity in the banking system—unchanged at 6% when it announces its decision on Wednesday. Some bankers and economists are also expecting status quo on repo rate citing factors ranging from inflation to rising crude oil prices to federal reserve’s rate cut. Inflation is one such factor that the RBI keeps -among other things- at the top while considering the policy change. In last policy meet, when country’s GDP slipped down to its lowest – in last 13 quarters – of 5.7 per cent, there were some calls for lowering interest rate to raise market demand for growth recovery. However, RBI governor said that the growth was mportant, but not at the cost of inflation.
Growth & inflation forecast
With growth recovering and inflation rising, RBI’s outlook for the rest of the financial year will be closely watched. In the last policy, RBI had revised the fiscal year 2017-18 growth target down to 6.7% from 7.3%, citing adverse shocks, especially to the manufacturing sector, from the implementation of the goods and services tax (GST). But the latest GDP growth number for the quarter ended September has inched upwards to 6.3% after five consecutive quarters of deceleration, showing signs of recovery. The market therefore growth to accelerate in the second half of the year.
Since the last policy in early October, inflation as measured by Consumer Price Index has accelerated, inching closer to the 4% mark, which is the central bank’s medium-term target. The most recent inflation print in October saw headline retail inflation rising to 3.58%, the fastest pace in seven months, because of rising food and fuel prices. The prices of India’s crude oil basket rose to $61.60 per barrel at the end of November from $55.36 per barrel at the start of October, due to rising global crude oil prices. With CPI inflation expected to rise in the second half of the financial year, market expects RBI to sound hawkish in the bi-monthly policy statement.
Crude Oil Prices
The second reason why the central bank may maintain the status quo is rising crude oil prices. In the last couple of month, the prices of India’s crude oil basket rose significantly. Earlier in November, financial services firm Nomura came out with a report, saying every $10 per barrel rise in the price will worsen India’s fiscal balance by 0.1 per cent and current account balance by 0.4 per cent of GDP. It further said that for a net oil importer like India, a sustained rise in crude oil price would have adverse macroeconomic implications.
“Higher oil prices are tantamount to a negative terms-of-trade shock that weakens growth, pushes up inflation and deteriorates the twin deficits (current account deficit and fiscal deficit),” the report added. The financial agency also noted that every $10 per barrel rise in crude oil price would hit the central government’s fiscal balance by 0.1 per cent of GDP. On October 9, the price of crude oil -Indian Basket- was $54.24. Now, the price -as on November 28- has shot up to $61.92. Rising crude oil prices may add to inflation and that is something the central bank may not want to cut any slack on.
Government finances commentary
The RBI is likely to reiterate its caution regarding the impact of fiscal slippages on inflation in the coming month. 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. While the government has committed to stick to the fiscal deficit target, there is uncertainty regarding the October indirect tax collection number post GST implementation.Market also does not rule out the possibility of some populist measures in the February budget which will be the last budget of the current government before election year. The fiscal strategy adopted by the centre will therefore be of crucial importance. Further, state government budgets are under some stress and this could continue if states themselves implement their own pay commission recommendations and more states announce farm loan waivers.
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