Wait & watch mode: RBI likely to maintain status quo again, monetary policy review on April 5
The Indian Express
April 02, 2018
George Mathew
While the recent increase in deposit rates and marginal cost based lending rate (MCLR) by many banks has raised the prospects for an across-the-board rise in interest rates, the RBI is set for a wait-and-watch mode in its monetary policy review later this week.
The Reserve Bank of India (RBI) is likely to keep key policy rates unchanged at its upcoming policy review on April 5 despite an improvement in growth indicators and with inflation surprising on the downside at a time when banks have started raising lending and deposit rates.
While the recent increase in deposit rates and marginal cost based lending rate (MCLR) by many banks has raised the prospects for an across-the-board rise in interest rates, the RBI is set for a wait-and-watch mode in its monetary policy review later this week. Soon after revising its term and bulk deposit rates by up to 50 bps, State Bank of India, India’s largest bank, had last month announced revision in its MCLR by up to 25 bps with effect from March 1. The one-year MCLR rate has been hiked to 8.15 per cent from 7.95 per cent earlier. Bond yields were also rising in the last a few months though yields eased after the government announced lower borrowings.
Lakshmi Iyer, Chief Investment Officer, Kotak Mutual Fund, said: “ The upcoming MPC meeting holds significance in terms of the guidance the RBI has to offer. The general market view is that of an extended pause. The market would also want to see the MPCs reaction to the recent axe in government borrowing programme and its view on the fisc thereof.” The Monetary Policy Committee (MPC) of the RBI, which will finalise the bi-monthly policy on April 5, is expected to provide its guidance on the inflation trajectory.
“Though our view is that of status quo, it would be interesting to see the MPC’s accompanying stance in the light of moderation in CPI (inflation) domestically and its reaction to the recent global developments,” Iyer said. Though retail inflation has trended lower at 4.4 per cent in February against the RBI’s projection of 5.1 per cent for the March 2018 quarter, the RBI is likely to retain its FY19 inflation projections with upside risk.
Tanvee Gupta Jain, Economist, and Rohit Arora, Strategist, UBS investment Bank, said, “we expect the MPC to maintain the repo rate at 6 per cent. We expect the tone of the policy statement to remain cautious while maintaining a neutral policy stance. With growth trends improving and inflation surprising on the downside, we believe the balance of risks doesn’t require the MPC to change its stance.” The MPC is likely to state to say that “economic growth is gathering momentum but that the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path.”
Care Ratings said the RBI has projected CPI inflation to average 5.1-5.6 per cent during the first half of FY19 in the last monetary policy review. “This is a signal that interest rates may not be eased this year and that there could be an increase. For the period April to date, interest rate movements have been varied,” it said.
Analysts said higher minimum support prices (MSPs) are likely to push up food inflation. In the FY19 budget, the government announced that the procurement price for kharif crop would be fixed at 1.5 times production costs at least. Depending on the extent of pass-through to retail prices, the increase in MSPs could add 40-60 bps to headline CPI inflation. Chances of global crude oil prices strengthening above $70-75 per barrel and risk of populist spending in the run up to the 2019 general election could undermine macro fundamentals.
However, Indian industry is worried about a rise in interest rates in the wake of the recent rise in MCLR and deposit rates. “The RBI should continue to maintain a status quo on the policy rate as indicators of inflation have started coming down. With CPI inflation hovering at around 4.5 per cent, there is scope for the cost of credit to moderate. Under the circumstances, a status quo in rates would address the upside risks to inflation while meeting the collective aspirations of growth,” Shobana Kamineni, President, CII, said.
On February 7, the RBI kept the key policy rate unchanged at 6 per cent for the third consecutive time and raised red flags on “several uncertainties” on the inflation front, impact of “fiscal slippage” indicated in the Union Budget and “five levies” that could impact investments and savings. RBI Governor Urjit Patel had the said “significant and postponed deviations” from them (fiscal targets) would make matters “more challenging” going forward and flagged risks from 7th pay panel implementation in states, spike in oil prices, hike in customs duties and fiscal slippage to 3.5 per cent in 2017-18 and a higher target of 3.3 per cent for 2018-19 as against the target of 3 per cent.
The RBI last cut the repo rate by 25 basis points to 6 per cent in the August 2017 review.
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