RBI Monetary Policy: Will rates be paused or hiked? These 3 factors are likely to shape decision

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Published: July 30, 2018 11:28:32 AM

The RBI's Monetary Policy Committee (MPC) begins its three-day meet today. The decision on rates will be announced on August 1.

The RBI’s Monetary Policy Committee (MPC) begins its three-day meet today. The decision on rates will be announced on August 1. Considering the recent hike in both CPI and WPI inflation, these two may play up as key factors in shaping committee’s decision this time. Other than that, MSP hike and oil prices may also drive the reaction of the policy makers. MSP hike could impact inflation and as the average inflation for FY 2019 could be 4.75 percent against 3.8 percent last fiscal, there is room for 25 bps hike in rates either pre-emptively now or in October, Kunal Shah, Debt Fund Manager, Kotak Life Insurance told The Indian Express.

“While the cuts in rates of the GST on various items may modestly subdue inflation, they would add to fiscal concerns. Moreover, the uptick in the core-CPI inflation in June 2018 and the risks associated with the trend of expenditure announcements by state governments, suggest that the MPC may opt for a pre-emptive rate hike in August 2018,” Naresh Takkar, Managing Director and Group CEO, ICRA, told The Indian Express.

“Depending on the impact of inflationary and fiscal risks on the inflation outlook, the MPC may raise the repo rate by 25-50 bps in the last three-quarters of FY2019. However, it may retain the neutral stance of the monetary policy instead of a shift to withdrawal of accommodation, to signal that the timing and extent of future rate hikes would remain data dependent,” Naresh Takkar also said.

However, there is a section of analysts that expects status quo to be maintained.

“In the upcoming policy review, we expect MPC to maintain its neutral stance while keeping the rates unchanged. We expect status quo on rates with neutral stance continuing as the policymakers await more economic data and monitor developments on global front. In particular, we think crude oil prices and trend in dollar will be most important to watch,” Edelweiss Securities said in a research note.

In June, the Reserve Bank of India hiked the key rate by 0.25 percent to 6.25 percent.

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