However, none of the 12 economists polled by Mint expects the central bank to tinker with rates. Here are five things that might be on the radar of the MPC:
Repo rate
The RBI is expected to keep the repo rate—at which the central bank infuses liquidity in the banking system — unchanged at 6.25% because it may want to see a more sustained trend of low inflation and weak growth before changing its stance to accommodative from neutral.
Interestingly, there is a seeming silence from the industry for a rate cut. One reason could be that loan rates have already come down substantially. Between January 2015 and April 2017, weighted average lending rates have come down by 169 basis points (bps), almost close to the 175 bps fall in repo rate in the same period. One bps is a hundredth of a percentage point.
Inflation
Fall in inflation as measured by the Consumer Price Index fell to a new record low of 2.99% for April. This has cemented the expectation that MPC members may soften their hawkish tone. Economists said that risks to inflation such as goods and services tax (GST) and monsoon rains are unlikely to have an impact and the next CPI (Consumer Price Index) reading is expected to be much below 4%, a target which the MPC is mandated with. In case the RBI lowers its inflation projection, it might be an indication that the central bank is letting go of its hawkish bias.
Growth
Acknowledgment of a sluggish growth—fiscal fourth quarter GDP growth slowed to 6.1%—is another factor that may nudge RBI to soften its tone. However, the commentary on whether the RBI thinks that the effects of demonetisation on growth are transitionary or not would be keenly watched.
Liquidity
While the banking system continues to be flooded with surplus liquidity, any major announcement to drain out liquidity is not expected in June 7 policy. The RBI has been using various tools to suck out extra liquidity from the banking system. But steps such as raising banks’ cash reserve ratio (CRR), or sale of government bonds under the open market operations, are ruled out.
An update on the Standing Deposit Facility (SDF), which the RBI is keen to introduce, would provide better clarity on the future of rate corridor, a gap between reverse repo and repo rate. In the April meeting, the RBI hiked reverse repo rate—through which it sucks out liquidity—by 25 bps to 6%. In the excess liquidity situation, reverse repo rate is seen as the effective policy rate.
In addition, if the RBI reveals how long the excess liquidity is expected to remain in the system, it may help understand the central bank’s strategy on FX interventions.
MPC members
It would be interesting to see if there would be a dissenting voice among the six members of the rate setting panel. So far, the decision on rate has been agreed upon by all the members. It was only the minutes of the April policy which showed that one member, RBI executive director Michael Patra, had suggested a pre-emptive 25 bps hike in the repurchase or repo rate. But Patra stopped short of voting for a hike and instead went for pause.
Source: Hindustan Times