Three reasons why RBI is unlikely to cut interest rate tomorrow

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Published: February 6, 2018 6:13:54 PM

The Reserve Bank of India (RBI) today began its sixth and last bi-monthly monetary policy meeting for the fiscal year 2017-2018, which will conclude tomorrow with the decision on the repo rate, which economists expect will remain unchanged due to the concerns over higher inflation.

reserve bank, reserve bank of india, rbi, assocham, bond market, monetary policy, gdp, hiking interest rates, interest rates, monetary policy committee, key policy rateThree reasons why RBI is unlikely to cut interest rate tomorrow. (Image: Reuters)

The Reserve Bank of India (RBI) today began its sixth and last bi-monthly monetary policy meeting for the fiscal year 2017-2018, which will conclude tomorrow with the decision on the repo rate, which economists expect will remain unchanged due to the concerns over higher inflation. The economists also expect the central bank to change its tone slightly hawkish.

Reuters quoting ANZ economist Shashank Mendiratta reported that the fiscal stance for 2018-2019 “will add to the hawkish rhetoric on two counts – the budgetary decision to allow aggregate spending to rise at a faster pace than nominal GDP; and the decision to effect an increase in minimum support prices.” Other economists pegged rising crude oil prices as the third reason for the RBI to remain cautious and not cut rates.

Fiscal Slippage:

In the Budget 2018, Finance Minister Arun Jaitley said that on account of lower GST revenue — accounting only for 11 months — the fiscal deficit target of the government at 3.2% of the GDP will be breached by 0.3 percentage points to 3.3%.

Crude Oil Prices:

The crude oil prices may be slumping for the past three days but it in last four months, it has surged by over $13 per barrel and even touched $70 per barrel mark in mid-January. According to the Economic Survey 2018 report, each $10 barrel increase in crude oil price leads an increase of 1.7 percentage point in the inflation. The RBI, in its October policy meet, had raised concerns over rising crude oil price.

Minimum Support Price:

As the government, in the Budget 2018, has vowed to increase the minimum support price by 1.5 times the cost, economists say that it may lead to higher inflation in coming days. The retail inflation in December was recorded over 5%, higher than RBI’s target even as WPI inflation recorded a three-month-low in the same period on the back of lower vegetable prices.

In the last monetary policy meets in December and October, the RBI had kept the repo rate unchanged as expected and stance ‘neutral’. In the last policy meet, the RBI had raised the inflation forecast for the remainder of the financial year 2017-2018 to 4.3-4.7%.

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