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Experts agree that inflationary pressure and GDP growth in Q2 could convince the RBI to maintain its current interest rates.

New DelhiThe bi-monthly Monetary Policy Statement, due on Wednesday, is unlikely to throw up any surprises. Polls conducted by major news organisations say that the RBI will keep its policy rates unchanged, with retail inflation threatening to rise beyond 4 per cent.

The RBI, in its October statement, had opted for a neutral stance with the repo rate — the rate at which it lends to scheduled commercial banks — at 6 per cent. The reverse repo rate — the rate at which the RBI borrows from scheduled commercial banks — was kept at 5.75 per cent.

Retail inflation reached a seven-month high of 3.58 per cent in October, up from 3.3 per cent in September, and this is likely to force the RBI to maintain status quo. Another factor it could take into account is the rise in crude prices to $61.60 per barrel at the end of November from $55.36 in October, analysts have been reported to have said.

Moreover, the fact that India has reached 96 per cent of its budgeted fiscal deficit estimate also puts pressure on the 3.2 per cent deficit target set by the government.

In the wake of the low GDP numbers in the April-June quarter, there was a growing demand in the market that the RBI should cut rates so that investment activity in the economy would grow. However, with a rebound in the GDP numbers in the second quarter, expectations are that interest rates will remain unchanged.

Expert opinion

A Business Standard poll of 10 economists concluded that a rate cut is not on the cards. Some of these economists have even cautioned that the trend of cutting interest rates could be over in India.

Meanwhile, an Economic Times poll conducted among 20 market participants said that the Monetary Policy Committee will likely vote to keep interest rates unchanged, citing inflationary pressure and recovery in economic growth. Many participants in the poll said that the RBI may adopt a more hawkish tone, with a warning on rising prices, and also pointed to the fact that the central bank, in future, could move to tighten its monetary policy stance.

All 15 participants in a poll conducted by Mint said the RBI would keep its interest rate on hold for a long period of time due to concerns over rising inflation. Plus, the recovery in economic growth, after a five-quarter sliding trend, will also weigh on the RBI.

Ratings agency ICRA, in a study, said: “Although the CPI inflation or retail inflation for October is lower than the range of 4.2 per cent to 4.6 per cent for the second half of FY18 that the MPC had forecast in its previous review, and the recent revision in GST rates would ease price pressures, certain inflation risks persist.”

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1 Comment Share Your Views

1 COMMENT

  1. It is possible that we can have economic growth without causing inflation. If growth is caused by increased productivity and investment, then the productive capacity of the economy can increase at the same rate as aggregate demand (AD).

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