RBI policy: Will there be a rate hike? Here’s what to expect from the Monetary Policy Committee today

The Reserve Bank of India (RBI) will announce the rate decision of the monetary policy committee (MPC) later in the day after a three-day long meeting.

Will there be a rate hike today? A section of economists do not rule out this possibility though the majority consensus is that the MPC will pause for now and set the stage for future rate hikes with a hawkish stance.

A rate hike at this stage would be too early. But, the language and tone of the policy will offer clues on the future course of interest rates. Here’s what to look for from the policy document:

Inflation remains tricky

The MPC would want to assess how the monsoon plays out this year and its full impact on prices across the board. Also, assessing the future trajectory of fuel prices would be key and it would make sense to wait for oil cartel OPEC's meeting later this month to understand the course of global crude oil prices.

In its April policy, the MPC had listed several risks to inflation. These included the revised formula for the MSP as announced in the Union Budget for fiscal 2018-19 for kharif crops that may have an impact on inflation, the staggered impact of HRA revisions by various state governments, further fiscal slippage from the Union Budget estimates for 2018-19 or the medium-term path that could adversely impact the outlook on inflation, and, finally, risks to inflation from fiscal slippages at the state level on account of a higher committed revenue expenditure.

Is the MPC still bullish on growth?

It will be critical to listen to what the MPC says about growth in its policy.

RBI logo. AFP.

RBI logo. AFP.

In the April policy, the MPC had noted that there are clearer signs of a revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January.

Secondly, global demand has been improving, which should encourage exports and boost fresh investment. “On the whole, GDP growth is projected to strengthen from 6.6 percent in fiscal 2017-18 to 7.4 percent in 2018-19 - in the range of 7.3-7.4 percent in H1 and 7.3-7.6 percent in H2 – with risks evenly balanced,” it had said.

Nothing much has changed since the last policy on the growth front. But, one needs to see whether the MPC maintains the stance.

Expect a message for the govt

In the April policy, the MPC said, “in case there is any further fiscal slippage from the Union Budget estimates for 2018-19 or the medium-term path, it could adversely impact the outlook on inflation. There are also risks to inflation from fiscal slippages at the level of states on account of higher committed revenue expenditure."

That was a clear cautionary message to the government that it needs to get the fiscal math right.

The MPC would want to watch as to how the fiscal situation pans out. It would not be too comfortable if the government fails to stick to the promised fiscal prudence path, and instead turn to populist policies in an election year. What is likely to happen is that the MPC will push a policy statement with a hawkish tone, detailing upside risks to the fiscal scenario ahead.

If the policy assumes a hawkish stance , that will not come as good news for the common man as his borrowing rates will certainly go up further.

In fact, banks have already begun to increase retail loan rates. This includes the country’s largest lender State Bank of India (SBI), Union Bank, Punjab National Bank and private sector lenders HDFC, ICICI Bank and Kotak Mahindra Bank. Post the latest round of hikes, the SBI’s one-year MCLR stands at 8.25 percent versus 8.15 percent earlier, and ICICI Bank’s start at 8.40 percent.

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Updated Date: Jun 06, 2018 10:44:50 IST

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