RBI is meeting for its bi-monthly Monetary Policy Review (MPC) between 4th to 6th June to decide whether to change the policy repo rate or keep it the same. The six-member committee is meeting one day ahead of its normal schedule and wrestles with the issue of finding the right monetary solution to address the complex macroeconomic conundrum for three days instead of two. The Committee has to deal with problems of high fuel prices, the rising inflation, and the last quarter’s economic recovery while deciding to review the repo rate (the rate at which the central bank infuses money in the banking system).
The Central Bank’s options are limited to going for a hike or keeping the rates unchanged, and as in the environment of rising Consumer Price Index (retail inflation) going for a rate cut is very unlikely. Going by the conventions of being a conservative central bank, the RBI may consider the option of raising the policy rates to play safe but most of the economists are suggesting that the committee will keep rates unchanged.
Naresh Takkar, Managing Director and Group Chief Executive Officer, ICRA said “Although the headline and the core CPI (consumer price index) inflation for April 2018 revealed negative surprises, an immediate rate hike may be premature given the lack of clarity on factors like the 2018 monsoon, minimum support price (MSP) and fiscal risks, however, the expected rebound in the average CPI inflation for FY2019, in conjunction with the higher-than-anticipated GDP expansion in Q4 FY2018, suggests that a back-ended rate hike cannot be ruled out, which is likely to be reflected in the tone of the policy document.”
In the last policy review in April, one MPC member Viral Acharya, more or less declared the rebirth of accelerating inflation in India which some economists had been warning about since he voted for a rate cut at the inaugural MPC meeting of October 2016. The economists in the government like Surjit Bhalla are against the central government behaving in a hawkish nature on inflation data. The criticism mainly comes on basis of how the RBI decides the ‘core’ inflation data. RBI’s definition of core is, excluding food and fuel but in India. Petrol (what is considered fuel in most parts of the world, and not the price of kerosene or electricity) is part of transport and communications. The former governor of RBI Raghuram Rajan also pointed out this many a time.
Mint surveyed the opinion of 15 economists on policy repo rate changes, of which 11 expect the RBI to keep the repo rate—the rate at which the central bank infuses liquidity in the banking system—unchanged at 6%. Only four economists expect RBI to raise rates by 25 basis points (bps).The monsoon is expected to be normal this season, therefore, any changes due to monsoon data are also very unlikely. The GDP growth of the country picked up in the last quarter, and the inflation, despite a nominal rise is still under the bandwidth (4 percent to 6 percent) which RBI agreed with Government of India in Monetary Policy Framework Agreement, 2015. Therefore, RBI should not increase the rates, keeping in mind the economic growth of the country. The interest rates always create a tussle between the central bank and government in every country in the world. There was a period in the United States known as Greenspan era (1987-2006) when the government and central bank kept the interest rates low for economic growth of the country. The government expects dovish interest rates for economic growth and the central bank argues for hawkish interest rates to combat inflation.
