Five things to look out for in RBI’s monetary policy today

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Mumbai: As the Reserve Bank of India (RBI) gears up for its monetary policy announcement on Wednesday, all eyes will be on governor Urjit Patel as the market expects a reduction in interest rates. Apart from the actual rate action though, announcements and commentary around some key issues will also be looked at closely by economists and analysts.

Here are five things to look out for in the upcoming monetary policy announcement:

• Rate cut: The RBI has consistently surprised the markets over the last two monetary policy announcements. For the current policy, the market widely expects repo rate to be reduced by 25 basis points (bps) to 6%. One bps is a hundredth of a percentage point. The government’s comparatively conservative fiscal deficit target of 3.2% for financial year 2017-18 would help in making this decision. If the RBI chooses to surprise the market once again, it would be imperative to know the regulator’s reasoning behind it.

• Inflation: Retail inflation decelerated to a two-year low of 3.41% in December from 3.63% the previous month as vegetable prices continued to fall. RBI is aiming to keep retail inflation under 5% in the fourth quarter and 4% within a band of 2 percentage points on either side in the medium term. Economists agree that the RBI’s assessment of the inflation situation would be crucial to understand all future rate movements.

• Demonetisation impact: This is the second RBI monetary policy announcement since Prime Minister Narendra Modi’s announcement of removing Rs500 and Rs1,000 currency notes from circulation. In the last monetary policy announcement, the regulator did not clarify the impact of demonetisation on growth in India. It would be crucial to find out if there are any real consequences of removing 86% of currency notes by value from circulation. Data points about the total deposits acquired by banks during the 50-day period and the number of new currency notes pushed back into the banking system would also be awaited.

• MPC decisions: All six members of the Monetary Policy Committee (MPC) have consistently been on the same side of the fence whenever it comes to monetary policy decision making. It would be important to see if all six votes are in favour of a rate cut or a pause, as economists believe that such a vote would show some dissonance between the way these members thought and voted.

Commentary on sectoral issues: The banking regulator has not made any major announcements around banking sector issues such as capital and asset quality since the demonetisation announcement. The March 2017 deadline talked by the RBI under former governor Raghuram Rajan is fast approaching and the banking sector’s bad loan trouble is nowhere close to being solved. It would be pertinent to watch out for the regulator’s commentary on the same.