Today's announcement is crucial for the markets as Reserve Bank had shifted from an "accommodative" to a "neutral" policy stance in its last meeting in February.
The RBI will announce its Monetary Policy today keeping in mind a multitude of Economic issues it has on its hands. Today’s announcement is crucial for the markets as Reserve Bank had shifted from an “accommodative” to a “neutral” policy stance in its last meeting in February. RBI’s previous assessment had suggested that inflation will pick up in 2017-18.
Amid abating global pressures and lingering domestic uncertainties, the RBI is likely to keep policy rates on hold today. In his third policy review on February 8 too, Governor Urjit Patel had surprised everyone by keeping the key policy rate unchanged at 6.25 per cent, although everyone was hoping for at least a 25 bps rate cut.
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Here are 5 things that will weigh on the minds of RBI monetary policy board members in chalking out today’s monetary policy:
1. Inflation: RBI’s in its previous policy was worried that the inflation will pick up in 2017-18 and may reach 5%, a view that looks to be coming true, looking at the inflation data. In January 2017 inflation was 3.17% and in February it rose to 3.65% and is believed to rise further on account of excess liquidity.
2. NPAs: A total of Rs 86,000 crore is still needed by banks to reach a provision cover of 65% of the gross NPAs of 9.5% of the total loans and there may still be more NPAs in the short term. RBI Monetary Policy Committee will weigh on this issue.
3. T-bill Rates: Currently most treasury bill rates are below the repo rate. The three-month treasury bill is now trading at 5.7% and one-year treasury bill at 6.10%, much below the repo rate. For a central bank, that just in the previous policy in February worried about inflation and shifted its stance from accommodative to neutral, this dip in yields below its repo rate could raise questions on the repo rate and the central bank itself.
4. Liquidity: Following demonetization, there is over Rs 4 Lakh Crore excess money in the system. This excess liquidity may drive the inflation higher and so to keep the inflation well below its target of 5%, RBI may take steps to remove excess liquidity from the system.
5. Rupee Value: Expert believe Indian Rupee is 22 percent overvalued in real effective exchange rate terms compared to a basket of 36 currencies of India’s trading partners and that RBI should address this situation. The Indian rupee has risen against a globally weak dollar and continued inflows from foreign investors. The rupee has outperformed its peers in last three months and stands at second place after Mexico, appreciating by 3% in March month itself.