RBI Monetary Policy Review: 5 things to expect from Raghuram Rajan on Tuesday

By: | Published: August 8, 2016 3:19 PM

Reserve Bank of India Governor Raghuram Rajan will be presenting his last monetary policy review on Tuesday. The policy review comes in the wake of slight unease over inflation that has been moving upwards during recent months.

RBI is likely to be on 'accommodative stance' mode given the possibility of food prices softening over the next few months and oil prices remaining low. (PTI)RBI is likely to be on ‘accommodative stance’ mode given the possibility of food prices softening over the next few months and oil prices remaining low. (PTI)

Reserve Bank of India Governor Raghuram Rajan will be presenting his last monetary policy review on Tuesday. The policy review comes in the wake of slight unease over inflation that has been moving upwards during recent months.

Here are 5 things that HSBC is expecting RBI Governor to do on Tuesday:

Keep rates unchanged: Given the rise in CPI inflation over the last few months, HSBC expects RBI to be put policy rates on hold in the upcoming meeting. They feel given the current macro-economic scenario, it would be best for the Central Bank to be on a wait-and-watch-mode for now.

Accommodative stance: RBI is likely to be on ‘accommodative stance’ mode given the possibility of food prices softening over the next few months and oil prices remaining low. The central bank might reiterate that it will cut rates if and when space becomes available. HSBC does not expect changes in the inflation or growth forecasts at this point, although the central bank could highlight more balanced risks on prices rather than ‘upside risks’, as it had done in the previous policy meeting (when oil prices were on the rise).

5-year inflation target: Government’s announcement on August 5 that the inflation target will be 4 per cent +/- 2 per cent for the next five years (until 31 March 2021) has illustrated the commitment of policymakers to lower India’s inflation rate sustainably and ensure monetary policy continuity. As such HSBC expects RBI to discuss the challenges of reaching the 4 per cent mid-point of the target, particularly the reforms required from the government’s end.

Liquidity and monetary transmission: HSBC expects RBI to discuss monetary transmission. Given that in the past banks had complained about tight liquidity conditions as a deterrent to monetary transmission, the RBI is likely to re-iterate the importance of banks cutting deposit and lending rates to support India’s growth recovery. Banks in turn, may flag the uncertainties from FCNR(B) outflows and elevated NPLs (non-performing loans) as reasons for lack of further transmission.

Roadmap for Monetary Policy Committee (MPC): The RBI Governor, Raghuram Rajan is expected to give some details on the timing and formation of the MPC in the meeting. Thereafter the announcement of the new RBI governor will also be made.

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