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MPC meet: RBI likely to hold key interest rates

The deliberations of the Reserve Bank of India's Monetary Policy Committee (MPC) will end today and the verdict is eagerly awaited. This is the first time that the six-member MPC, headed by RBI Governor Urjit Patel, is meeting for three days instead of the usual two since it was constituted in June 2016.

twitter-logo BusinessToday.In        Last Updated: June 6, 2018  | 12:14 IST
MPC meet: RBI likely to hold key interest rates

The deliberations of the Reserve Bank of India's Monetary Policy Committee (MPC) will end today and the verdict is eagerly awaited. This is the first time that the six-member MPC, headed by RBI Governor Urjit Patel, is meeting for three days instead of the usual two since it was constituted in June 2016. "Owing to certain administrative exigencies, the Second Bi-monthly Monetary Policy meeting for 2018-19 will now be held on June 4-6, 2018 instead of on June 5-6," the apex bank said in a statement.

So will the committee decide to continue holding interest rates steady or will it vote for a rate hike? The expectation is that the central bank might wait till August before hiking the key interest rate to contain inflation, being fuelled by high crude oil prices. To remind you, the RBI last raised the short-term lending rate (repo) to 8 per cent in January 2014. Since then it has either reduced it or maintained status quo.

In the last MPC meet, held in April, RBI Deputy Governor and member of the panel Viral Acharya had indicated that he would vote for withdrawal of monetary accommodation in the June policy. Another member Michael Patra had voted for a hike in repo rate but was overruled by majority that opted to hold rates steady at 6 per cent.

"We pencil in 50 bps of rate hike in 2018-19 (earlier pause) possibly split between August and October," said domestic brokerage firm Kotak Institutional Equities, adding, "But we do believe that the MPC votes are likely to be evenly balanced in the June meeting thereby keeping the chances of a rate hike alive in June."

Radhika Rao, India Economist with DBS Group, for one, expects a hike in the short-term lending rate in June itself. "We expect the Monetary Policy committee to sound hawkish, with a rising probability that they will vote for a pre-emptive 25 bp rate hike in June, to maintain financial stability and contain second-round inflationary impact from higher oil prices and a weaker rupee," she said.

Retail inflation, a key data for the RBI, has remained above 4 per cent since November 2017. Reversing the declining trend of three months, retail inflation inched up to 4.58 per cent in April. The Wholesale Price Index (WPI) based inflation, too, rose to 3.18 per cent in April, mainly on account of a spike in fuel prices over the past few months. While petrol in Delhi now costs Rs 77.72 a litre, diesel is at Rs 68.80 per litre.

Others hope that the MPC will continue to maintain status quo for longer. "Notwithstanding the clamour for a rate hike in market, we believe ground realities call for caution and not rate action," SBI pointed out in its research 'Ecowrap' report. But the country's largest lender - along with Punjab National Bank and ICICI Bank - has already raised their lending rates from June 1, signalling hardening of the interest rate scenario. Some banks, SBI included, have also increased their deposit rates.

However, the clamour for a cut in the benchmark lending rate has reduced courtesy the seven-quarter high GDP growth rate of 7.7 per cent during the January-March period of 2017-18 and the predictions of a normal monsoon.

With PTI inputs

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