Mumbai: After a three-day long deliberation, the Reserve Bank of India’s (RBI) monetary policy committee (MPC) is set to announce its decision on key policy rates today. A rate hike is imminent as RBI tries to rein in inflation and shore up the rupee. 12 out of 15 economists surveyed by Mint expect RBI a 25-basis-point hike in repo rate to 6.5%. However, there is a minority which expects no change in policy rates. This will be the second consecutive rate action post the surprise rate hike in June when RBI tightened policy rate for the first time since 2014. RBI will announce its policy decision after 2.30 pm today.
Here are five things that might be on the radar of the monetary policy committee:
Policy action and stance: Even as the market expects a rate hike, there are three likely scenarios that can emerge from today’s policy. First, the RBI could hike policy rate and keep the policy stance unchanged at neutral, giving itself the flexibility to move in any direction in future. In the second scenario, the RBI could change the stance from neutral to hawkish, signaling that more rate hikes are imminent. Lastly, the RBI could signal a pause followed by neutral stance.
Inflation outlook: Retail inflation continues to rise, posing a threat to RBI’s 4% target. Core inflation, excluding food and fuel, is likely to stay above 6% until October. While global crude prices have declined, they are still above $70 a barrel, posing a threat to current account deficit and inflation outlook. The government has announced a hike in minimum support price for all kharif crops, which according to economists, is likely to have a 40-60 basis points impact on inflation in the second half. The central bank’s inflation outlook for the second half is pegged at 4.7%, which according to some economists is likely to see an upward revision in today’s policy.
Growth outlook: RBI remains confident of a rebound in the economy with a pick-up in investment activity, rising capacity utilization and increased consumer spending. The central bank expects output gap – the gap between the level of economic activity and its potential- closing. Given these positive trends, the central bank is likely to keep the growth outlook for the fiscal year 2018-19 unchanged at 7.4%.
Liquidity: The liquidity situation has tightened since the last policy and may turn worse, say economists, as a government borrowing programme takes off in the second half of the year. However, economists expect RBI to maintain a neutral stance with the promise to provide liquidity through open market operations to the extent system is in deficit due to forex intervention.
Voting pattern: The last policy had surprised the market with all the six monetary policy committee members, including the most dovish member Ravindra Dholakia, voting in favour of a rate hike. In today’s policy, the expectation is that the MPC will either go for a unanimous vote or 5:1 vote in favour of a rate hike.