The Reserve Bank of India's six-member Monetary Policy Committee will announce its policy decision on repo rate later in the day. Reports suggest that the central bank is unlikely to change repo rate despite India's economic recovery - 6.3 per cent GDP growth in July-September quarter - and Moody's ratings upgrade in 14 years. Some bankers and economists are also expecting status quo on repo rate citing factors ranging from inflation to rising crude oil prices to federal reserve's rate cut.
Inflation is one such factor that the RBI keeps -among other things- at the top while considering the policy change. In last policy meet, when country's GDP slipped down to its lowest - in last 13 quarters - of 5.7 per cent, there were some calls for lowering interest rate to raise market demand for growth recovery. However, RBI governor said that the growth was mportant, but not at the cost of inflation.
Here's what could hold the RBI back from any policy change
RBI Governor Urjit Patel in the last MPC meet had said: "We have to be vigilant on account of uncertainties on the external and fiscal fronts; this calls for a cautious approach." The central bank did not change lending rate for commercial banks citing risks to inflation and kept it 6 per cent. So, what is the current status of inflation this time. According to data released in November, India's annual rate of inflation based on wholesale prices -Wholesale Price Index or WPI- shot up to 3.59 per cent in October. Not only this, even retail inflation -consumer price index or CPI- for October rose to 3.58 per cent from 3.28 per cent in September.
The RBI in its October meet had expected inflation to range between 4.2-4.6 per cent in the second half of this year. Considering RBI's cautious approach towards inflation one could safely predict that there will hardly be any change. Global financial services major Nomura has reportedly said that while lower GST rates have moderated output prices, input cost pressures are marginally higher, which along with higher food inflation is likely to push retail inflation slightly above the RBI midpoint target of 4 per cent in November and beyond. "We expect a hawkish hold from the RBI and policy rates to remain unchanged through 2018," Nomura said ahead of the MPC meet.
Crude Oil Prices
The second reason why the central bank may maintain the status quo is rising crude oil prices. In the last couple of month, the prices of India's crude oil basket rose significantly. Earlier in November, financial services firm Nomura came out with a report, saying every $10 per barrel rise in the price will worsen India's fiscal balance by 0.1 per cent and current account balance by 0.4 per cent of GDP. It further said that for a net oil importer like India, a sustained rise in crude oil price would have adverse macroeconomic implications.
"Higher oil prices are tantamount to a negative terms-of-trade shock that weakens growth, pushes up inflation and deteriorates the twin deficits (current account deficit and fiscal deficit)," the report added. The financial agency also noted that every $10 per barrel rise in crude oil price would hit the central government's fiscal balance by 0.1 per cent of GDP. On October 9, the price of crude oil -Indian Basket- was $54.24. Now, the price -as on November 28- has shot up to $61.92. Rising crude oil prices may add to inflation and that is something the central bank may not want to cut any slack on.
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