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RBI policy review: Key factors to watch out for

It will be first time that meeting is going on for 3 days because of "administrative exigencies".

Updated: Jun 04, 2018, 10.08 PM IST
RBI policy on Wednesday: Here's what to expect
RBI policy on Wednesday: Here's what to expect
NEW DELHI: RBI's rate-setting panel is meeting today for its second bi-monthly policy review of 2018-19.

The decision is due on Wednesday.

It will be the first time that the meeting is going on for three days because of "administrative exigencies".

In the normal course, the MPC (monetary policy committee) meets every two months for two days before making public its stance.

What is there on the table? Let's find out.

Hawkish stance: While the apex bank may not go for a rate hike this time, air is rife with speculation that it will change its policy stance to hawkish from neutral. According to an ET poll covering 25 market participants, the RBI would harden its stance to hawkish, a precursor to an eventual increase in benchmark rates by the next meet in August.

“We expect the MPC to sound hawkish, with a rising probability that it will vote for a pre-emptive 25 bps rate increase in June to maintain financial stability and contain second-round inflationary impact from higher oil prices and a weaker rupee,” said Radhika Rao, an economist at DBS Bank.

The RBI has refrained from tweaking the repo rate since August 2017 citing inflationary concerns. However, Reuters says India could join the growing club of emerging market central banks that are tightening monetary policy as it may deliver its first interest rate hike in nearly four and a half years.

Inflation: RBI's commentary on inflation will be keenly watched. A Prasanna, Chief Economist at ICICI Securities Primary Dealership in Mumbai, expects the RBI to revise its consumer inflation projection upwards by 0.3-0.4 percentage points for March 2019 as the "risks to inflation are overwhelmingly ranged on the upside".

In its April meet, the RBI revised projected CPI inflation for 2018-19 to 4.7-5.1 per cent in H1 2018-19 and 4.4 per cent in H2, including the HRA impact of central government employees, with risks tilted to the upside.

Commentary on rising fuel prices: The MPC is expected to weigh in on hardening domestic fuel prices. The domestic retail petrol and diesel prices are at an all-time high on account of spike in crude oil prices in the international market. Dearer petrol and diesel can further fuel inflationary expectations.

GDP growth: Indian economy grew at 7.7 per cent in January-March, keeping the tag of world's fastest-growing economy. The full FY18 growth estimate was revised upwards to 6.7 per cent from 6.6 per cent in the second advance estimate released in February.

In April meet, the bank had said several factors were expected to accelerate the pace of economic activity in 2018-19. On the whole, GDP growth is projected to strengthen from 6.6 per cent in 2017-18 to 7.4 per cent in 2018-19 – in the range of 7.3-7.4 per cent in H1 and 7.3-7.6 per cent in H2 – with risks evenly balanced, it had said.

How divided will the MPC be this time?

In its last policy review, RBI Deputy Governor and MPC member Viral Acharya had indicated that he would vote for withdrawal of monetary accommodation in the June policy. Another member Michael Patra had voted for a hike in repo rate, but was overruled by a majority that opted for status quo. Hence, it would be worth watching how divided or united the MPC members are this time around.

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