RBI monetary policy: Rate cut or hike? These 3 factors are likely to shape decision

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Published: June 4, 2018 12:44:34 PM

Rising crude oil prices, weakening rupee and imminent MSP increases are most likely to influence RBI’s decision on interest rates in the upcoming monetary policy review.

monetary policy, april, RBI, GDP, indiaRBI’s monetary policy committee (MPC) will meet from 4-6 June for the second bi-monthly monetary policy review. (Reuters)

Rising crude oil prices, weakening rupee and imminent MSP increases are most likely to influence RBI’s decision on interest rates in the upcoming monetary policy review. “Our call is influenced by persistent shocks of higher fuel prices and weaker rupee 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, the RBI could have some space to maintain status quo,” Kotak Research said.

The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) will meet from 4-6 June for the second bi-monthly monetary policy review for 2018-19, and the resolution of the MPC will be announced on 6 June.

“In our baseline forecasts (Brent future curve), in which the oil price gradually retreats from $ 79 per barrel currently to $72 per barrel towards end-2019, we expect the MPC to hike rates by 50 bps in the rest of FY19 starting from its August meeting. However, a crude oil shock (towards $ 100/bbl) and/or Indian rupee weakness higher than 70 to the US dollar may cause the rate hike cycle to start sooner (June) and be more aggressive (at least another 75 bps from now),” UBS said.

“The June policy decision is a close call; we assign a 40 per cent probability to the MPC voting for a 25 bps hike in June itself, followed by another 25 bps hike in August,” said a Nomura Global Economics report.

Lending rates hike

The rising bond yields and capital outflows may also influence the RBI’s decision this time around. Over the last week major banks including State Bank of India (SBI), Punjab National Bank (PNB), ICICI and HDFC raised prime lending rates by 10 basis points. In the month of April and May, foreign investors have pulled out Rs 29,680 crore from the debt market and Rs 15,500 crore from the equity market. It has weakened rupee against dollar recently. Rising bad loans have also affected appetite for government bonds in the past few days.

At present, the repo rate stands at 6 percent. The reverse repo rate is 5.75 percent, the marginal standing facility (MSF) rate and the bank rate stand at 6.25 percent.

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