The monetary policy committee of the (RBI) is expected to keep its interest rate unchanged today despite a sharp slowdown in economic growth
RBI Policy Makers Face Tough Challenge, Interest Rate Decision Today
The monetary policy committee of the Reserve Bank of India (RBI) is expected to keep its interest rate unchanged today despite a sharp slowdown in economic growth. The Confederation of Indian Industry (CII) has called for an interest rate cut of 100 basis points for boosting the economic growth rate. Economists say that inflation concerns however could rule out any chance that the RBI will cut the repo again, after lowering it by 25 basis points to a 7-year low of 6 per cent at its last meeting in August, even as economic growth unexpectedly slowed to a three-year low of 5.7 per cent. All but 3 of 60 analysts surveyed by Reuters expect the monetary policy committee to keep the repo rate unchanged today.
RBI Monetary Policy Preview In 10 Points
1) The RBI will announce its decision at 2:30 pm today.
2) Consumer inflation surged to a five-month high in August, threatening the central bank’s target. The RBI has made a priority of maintaining consumer inflation at around 4 per cent – the midpoint of its mandated target of 2 to 6 per cent.
3) Amid rising global oil and commodity prices, the RBI is thus expected to react with concern after a surge in food prices increased retail inflation to 3.36 per cent in August from a year earlier.
4) The RBI’s could also exercise caution given that crude prices have rallied to their highest in more than two years, a worry given India imports most of its energy needs.
5) Worryingly, core inflation – which excludes energy and food – has remained even higher, reaching 4.6 per cent in August amid stubbornly high prices in key areas such as health and education.
6) The Reserve Bank of India is also likely to be concerned by growing expectations that the government will ramp up spending to boost growth, potentially leading to a loosening of its current fiscal deficit target of 3.2 per cent of gross domestic product for the year ending in March.
7) The RBI will also be deterred from easing given lingering uncertainty as the US Federal Reserve gears up to start unwinding some of its massive monetary stimulus later this year and continues to gradually raise US interest rates.
8) India has already saw net outflows of over $1.11 billion in equities last month, adding to their $2 billion in sales in August. That helped send the rupee down more than 2 per cent, its biggest monthly fall since November.
9) A weaker rupee would raise concerns about market stability and further raise the prospect of a rise in imported inflation.
10) RBI’s comment on growth and inflation would be closely watched. The RBI in August had projected gross value added (GVA) growth of 7.3 per cent for 2017-18. Economists widely expect the RBI to downgrade its growth forecast for this year.