A year ago, the Reserve Bank of India (RBI), had shifted its monetary policy stance from 'accommodative' to 'neutral'. A 'neutral' stance actually meant that RBI would move either way as against easing under the 'accommodative' stance. In fact, the RBI moved reluctantly southwards by reducing the repo rate, the rate at which banks borrow funds from RBI, marginally by 25 basis points to 6 per cent since the February last year.
In its sixth bi-monthly monetary policy statement, there are all indication of a status quo in the repo rate at 6 per cent. There are all indication now for a change in the stance as the rates could higher going forward.
The 'cautious' stance is most desired thing now as the CPI inflation tracked by RBI is at 5.21 per cent in December 2017, which is the highest in the last 17th month. The Brent crude oil prices are hovering at $68.01 a barrel, which can bring imported inflation via oil and other items. The road map for fiscal consolidation is also looks somewhat uncertain. The government is also likely to breach the fiscal deficit target of 3.2 per cent for 2017-18 by ending the fiscal at 3.5 per cent. The target for next year is fixed at 3.3 per cent, which is also slightly higher and raises questions as being the election year.
There was a long period of accommodative stance of RBI from January 2015 when celebrated economist Raghuram Rajan was at the helm of affairs at the RBI. The repo rate saw reduction from a high of 8 per cent three years ago under the accommodative stance to 6 per cent currently. A year ago, the RBI rightly put the interest rate easing under 'neutral stance' as it saw signs of inflation especially food inflation flaring up. And the inflation did surprise everyone by not only crossing the 5 per cent mark, but also going beyond the RBI's projection of 4.3-4.7 per cent for Q3 and Q4 of 2017-18.
Going forward, there are high expectation of interest rates rising, which is already building in the bond yields, which are at 7.50-7.60 per cent. A rise in the yield means, the government borrowing would happen at a higher rates and also the other borrowing of banks and corporate sector. The largest bank in the country, the State Bank of India (SBI), has recently hiked the bulk deposit rates. Many say the banks will soon hike the other deposit rates, which in turn push up the cost of funds, and eventually necessitating a hike in lending rates.