RBI likely to maintain status quo in August policy meet

Vastavam web: The Reserve Bank is likely to maintain status quo on the key interest rate on Wednesday notwithstanding elevated oil prices and government’s announcement to steeply hike minimum support price for kharif crops, opined experts.The central bank had increased the benchmark short term lending rate(repo rate) by 0.25 per cent to 6.25 per cent in its last monetary policy review in June on inflationary concerns.

Reserve Bank Governor Urjit Patel-headed Monetary Policy Committee (MPC) will begin its three-day deliberations from Monday in Mumbai to decide on the interest rate.The retail inflation, which is factored in by the MPC, spiked to a five-month high of 5 per cent in June on costlier fuel.

The government has mandated the Reserve Bank to keep inflation at 4 per cent (+/- 2 per cent).Crude oil prices have come off three year high, but continue to be volatile threatening inflation and current account deficit.India’s largest bank SBI feels that RBI may not go for another round of rate hike at this juncture.The only reason for a rate hike by RBI at this juncture might be to “satiate the self fulfilling prophecy” of market expectations of a rate hike to stem the rupee depreciation (though rupee depreciated by 3 per cent post June), it added.

In SBI’s view, inflation risks are still evenly balanced. While the MSP hike could statistically push up CPI by 73 basis points, such inflation is unlikely to materialise as it is purely subject to procurement by the Central government/State Government. Earlier this month, the Union Cabinet steeply hiked the minimum support price for kharif crops, including Rs 200 per quintal for paddy, as the government looked to fulfil its poll promise to give farmers 50 per cent more rate than their cost of production. Global financial services major DBS in a research report, however said RBI is expected to go for further rate hikes this fiscal, with the next increase in the August meet.

According to DBS, upside risks to inflation and a need to maintain financial markets’ stability will keep monetary policy on a tightening bias.”We expect 50 bps more hikes in 2018-19, with the next likely in August,” Radhika Rao, an economist with DBS said.Private sector lender HDFC Bank believes that the decision on rate hike is a “close call” for RBI, but its rate-setting panel will go for a status quo on key policy rates in the upcoming policy review meet.