1. Here’s what is expected in RBI’s monetary policy review

Here’s what is expected in RBI’s monetary policy review

RBI will announce its second bi-monthly monetary policy review for the current fiscal today. While it is expected to maintain status quo on key rates, it is expected to change its tone from hawkish till the last meeting to a softer statement today.

By: | Published: June 7, 2017 2:26 PM
“The RBI will do an 180-degreee turn from their hawkish stance of the last meeting. Stopping short of a rate cut, the RBI will promise that it will be ready to do what it takes to bring back growth,” HDFC Securities said in a research report. (Image: Reuters)

The Reserve Bank of India (RBI) will announce its second bi-monthly monetary policy review for the current fiscal today. While the central bank is expected to maintain status quo on key rates, it is expected to change its tone from hawkish till the last meeting to a softer statement today.

“The RBI will do an 180-degreee turn from their hawkish stance of the last meeting. Stopping short of a rate cut, the RBI will promise that it will be ready to do what it takes to bring back growth,” HDFC Securities said in a research report.

The brokerage expects RBI to hold rates steady, even as it cites lower inflation and tepid Q4 GDP data as reasons for a rate cut. “While we would have linked the RBI to cut rates now, it won’t. We in turn expect the RBI to metamorphose into a dove from a hawk that it once was at the last meeting. However, it would like to give itself the elbowroom to see how the monsoons and the other economic indicators progress. A change of stance before it actually goes out and cuts rates will also add to its credibility as an institution that does not take the markets by surprise,” HDFC Securities report concludes.

DBS, another brokerage house, also expects the RBI to keep benchmark rates steady, considering the likelihood of inflation inching up again later in the year. “Instead, guid­ance is likely to soften, as the committee emphasise that their ‘neutral’ stance allows them to move in either direction,” DBS said in a research report.

“While the central bank has a penchant to surprise (Dec16 and Feb/Apr17 meetings are case in point), a forward-looking approach might deter the RBI from lowering rates today. Base effects will turn adverse towards end-year, pushing inflation back above 4.0%. Growth is also expected to stabilise from the note-ban slump,” the DBS report adds.

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However, the government is rooting for a rate cut to boost falling GDP growth rate, down to 7.1 percent for the Financial Year 2017 from 8 percent in the previous fiscal year. Arun Jaitley, Finance Minister, earlier said in an interview to CNBC-TV18 that based on available indicators such as low inflation, stable oil prices, and lagging growth and investments, the MPC should look to cut policy rates.

He further said that inflation has stayed under control for a long time and is expected to remain under control in the near future as well on account of a possibility of a good monsoon this year adding that the equilibrium between crude prices and shale gas prices will ensure that oil prices do not go through the roof and will remain in a range that is affordable by India. Jaitley quipped that given the current set of indicators, mentioned above, any Finance Minister would want the RBI to cut rates and so would the private sector.

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