Poll shows RBI likely to hold rates for now, but may hike in the next MPC

Last Updated: Wed, Jun 06, 2018 11:36 hrs
A man speaks on his mobile phone outside the RBI headquarters in Mumbai

The three-day monetary policy committee is expected to announce its decision on interest rates on Wednesday.

Even as the MPC meeting got underway on Monday, economists and speculators were deliberating the stance that the RBI could adopt. The expert panel, according to speculators would hold a critical stance on the growing oil prices which have lead to higher domestic inflation.

Rising oil prices and a weakening of the Rupee may have prompted the RBI to extend the usually two-day meeting by another day. Around mid-May, the Reserve Bank of India (RBI) issued a notice about the extraordinary extension of the MPC meeting due to "administrative exigencies".

This was a one-off case and the regulator said there were no changes to the two-day meeting schedule for the rest of the fiscal.

Although there has been a fervent chatter around the RBI adopting a hawkish stance and suggesting a rate-hike, a Reuters poll of 56 economists found that the RBI may adopt a dovish stance for the time-being. 46% of these economists expected the RBI to proceed with a rate-hike.

Most economists were optimistic that the MPC may hold the rates, in light of the recent GDP data that has shown economy moving at a fastest pace in nearly two years. The poll also found most economists suggesting that the RBI could look at a rate-hike of 25 basis points or 0.25% during its subsqeuent meeting in August.

The poll was somewhere closer to a research from Kotak economics that also suggested a rate hike during August. But analysts at Kotak also said that a status-quo would depend heavily upon MSP prices. This owing to factors besides crude-oil prices such as weakening rupee, persistent core inflation pressures, and a worsening CPI outlook.

"The nub of the June RBI MPC meeting will be choosing either a wait-and-watch approach or being pre-emptive amid adverse inflation risks. We now see scope of a shallow rate hike cycle which balances emerging price pressures with a nascent cyclical economic recovery. Our call is influenced by persistent shocks of higher fuel prices and weaker INR along with incipient risk of higher-than-usual MSP increases. We pencil in 50 bps of rate hike (August and October) and expect June policy to strongly signal the same. However if MSP increases are in line with recent trends, RBI could have some space to maintain status quo," read the note from Kotak Economics.

For those unversed, the RBI's six-member committee has been entrusted with the task of setting the benchmark interest rate after an amendment was passed through the Finance Act, 2016. Prior to the establishment of the MPC, the RBI Governor was responsible for setting the interest rate. In the previous Bi-Monthly Monetary Policy statement announced in April, the MPC had kept the repo rate and reverse repo rate unchanged at 6% and 5.75% respectively.

The last rate hike was announced by RBI in January 2014 when the repo rate was increased to 8 percent. Since then, RBI has either reduced the rate or maintained status quo.

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