The MPC (Monetary Policy Committee) of RBI is holding a meeting to decide its policy on key rates. Instead of the usual two day affair, this time the MPC headed by the RBI governor Urijit Patel is meeting for three days (June 4-6). The RBI has cited "administrative exigencies" as the reason for the longer meeting. According to the official economic data released on May 31, the Indian economy grew at 6.7 per cent in the fiscal year 2017-18. The Indian economy has shown consistent growth in each of the constituent quarters - 5.6 per cent in Q1, 6.3 per cent in Q2, 7 per cent in Q3 and 7.7 per cent in Q4.
Meanwhile, consumer price inflation was 4.6 per cent in April 2018. Inflation has remained higher than RBI's 4 per cent target since November 2017, but it is well within the upper band of 6 per cent. In its Monetary Policy Report last April, RBI had expected inflation to pencil 5.1 per cent in the first quarter of 2018-19.
State Bank of India, ICICI Bank and Punjab National Bank have already increased their lending rates due to weak deposit growth, even before RBI could take a call on rate hike.
Economists forecasted the RBI to raise rate by 25 bps in August followed by another hike in October. However, looking at the economic rebound the hike is expected to be announced after the MPC meeting on June 6.
Investors have been pulling money out of the Indian market amid sky-rocketing NPAs and banking frauds and a rate hike would strengthen investor's confidence. Indonesia and Philippines recently hiked their rates and India is expected to follow.
If the RBI increases the rate then loans would become costlier decreasing the liquidity in the markets and ultimately reducing the spending power. Keeping in mind the high inflation, RBI would have to be very cautious while increasing the rates. Rise in crude oil prices is also contributing to the high inflation.
If Rates remain unchanged then RBI would have to adopt a hawkish approach and would have to let the crude oil price stabilize before taking a call in the next MPC meeting. If Rates are decreased further this would lead to more money supply in the economy as loans would be cheaper, directly benefiting the loan seekers. The consumers would have more money in their hand to spend providing a boost to the economic growth.
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