The Reserve Bank of India will release its bi-monthly monetary policy statement today around 11 AM. As the markets keep their fingers crossed on whether governor Raghuram Rajan will reduce the rate or not, here is a look at the three things to watch out for.
1) Will rate be cut or not?
The central bank has reduced its policy rate by 150 basis points until now since January 2015. But banks have cut their rates only about 70 bps. In short, the economy is yet to get the full benefit of the rate cut. So, will Rajan be ready for another rate cut? Remember, Rajan has time and again persuaded banks to pass on the rate cuts to customers. He once said that more rate cuts are possible only if banks cut their interest rates. However, this time round, more than transmission, Rajan will most likely be worried about the monsoon and its impact on retail inflation. The retail inflation has been inching up gradually, recently. Moreover, crude oil is also witnessing a mild upswing. On the whole, will Rajan choose to wait is the question. (Read about it here and here)
2) What about liquidity?
Economists have told Mint newspaper that this policy is likely to be mostly a stock taking of the liquidity measures the RBI has taken until now. The report notes that cash in the banking system has increased after these measures. The cash deficit has declined to Rs 60,000 crore from about Rs 2 lakh crore about three months ago. The RBI has infused Rs 70,000 crore through bond purchases, says the Mint report. However, the bond yields continue to stay high, reflecting the general rate scenario in the economy. So, will Rajan take more liquidity easing steps going ahead? That may help banks to reduce rates too.
3) Will Rajan stay or go?
That is the question every body needs an answer for. A report in The Deccan Chronicle today says the Prime Minister's Office has thrown its weight behind Rajan and even cleared his name for a second term. But will Rajan stay if the government wants him to? Earlier, there were reports that he has expressed his intention to move on. If he decides to leave even though the government wants him to continue, that will definitely be a loss of face for the NDA government. But the question is, will Rajan drop any hints as to what his plans are at the policy today?