The monetary policy committee concludes its three-day meeting today. While a majority of economists are still forecasting a status quo in the policy rate, some are expecting the rate hiking cycle to begin in June. Fourteen of 43 economists polled by Bloomberg expect a 25 basis point hike in the repo rate to 6.25 percent. If a status quo is maintained, economists expect that to be accompanied by a change in stance to ‘withdrawal of accommodation’, suggesting a rate hike is imminent. Should the MPC vote for a rate hike, it would be the first since January 2014. A Split MPC? Many in the markets expect a split verdict from the MPC. Minutes of the April policy review had shown that RBI Deputy Governor Viral Acharya is likely to vote for a ‘withdrawal of accommodation’ in the June policy. RBI Executive Director Michael Patra already voted for a rate hike in April and is likely to maintain that stance in June. Among the other four MPC members, Chetan Ghate, too, expressed concerns about structural inflation pressures. RBI Governor Urjit Patel said he would wait for more incoming data on inflation. Since the April meeting, oil prices have risen 12 percent and the rupee has weakened 3 percent. These factors have only added to inflation concerns and could tip the scales in favour of a tighter monetary policy. With growth reviving as expected, committee members may be more comfortable in shifting focus to their primary mandate of inflation control. Should the MPC find itself equally divided, Governor Urjit Patel can use his casting vote to break the tie.<doc-sep>Mumbai: The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) is set to announce its decision on key policy rates today. While the market expects the repo rate to be kept unchanged, RBI may signal withdrawal of its accommodative policy. What is RBI expected to do today? The majority of economists polled by Mint expect RBI to keep the repo rate unchanged this week, but anticipate a rate hike in the August policy. RBI, they think, will wait for more clarity on the monsoon and minimum support prices before taking a call. However, a few expect the central bank to hike the repo rate by 25 basis points on the back of high oil prices and rising inflation. That said, all of them expect RBI to sound hawkish, given that April’s headline and core inflation have crossed RBI’s medium-term target of 4%. What impact do oil prices have on the Indian economy? As the world’s third-largest oil importer, higher crude oil prices will adversely affect India’s fiscal and current account deficits, which in turn will have a spillover impact on consumption, monetary policy and investment behaviour. According to analysts, an increase of $10 per barrel in crude oil prices will lead to an adverse impact of $10-11 billion (or 0.4% of GDP) on current account deficit. The impact on inflation will depend on the pass-through effect of higher crude prices to consumers. What else should one watch out for? Besides future policy cues, the market will watch for Urjit Patel’s remarks on banking. His views on bank recapitalisation and bad loans will be examined. How will markets react to the RBI monetary policy? As RBI prepares to withdraw an accommodative policy, financial markets have already priced in higher borrowing costs. The 10-year government bond yield is up nearly 73 bps since the April policy, and is unlikely to react if RBI hikes rates. The rupee has weakened by 3.2% in the last two months and has crossed 68 against the dollar. The rupee’s recent depreciation has intensified mainly on a crude price rise and negative foreign portfolio flows. One basis point is one-hundredth of a percentage point. And what about consumers? Banks have begun hiking both lending and deposit rates even before waiting for a signal from RBI. Taking a cue from the bond market, large banks such as State Bank of India, ICICI Bank and Punjab National Bank have raised their marginal cost of funds-based lending rate by as much as 10 bps each. If RBI indeed hikes policy rates on Wednesday, it could lead to a further increase in deposit rates, followed by lending rate hikes. Subscribe to Mint Newsletters * Enter a valid email * Thank you for subscribing to our newsletter.<doc-sep>A rate hike at this stage would be too early. But, the language and tone of the RBI policy will offer clues on the future course of interest rates The Reserve Bank of India (RBI) will announce the rate decision of the monetary policy committee (MPC) later in the day after a three-day long meeting. Will there be a rate hike today? A section of economists do not rule out this possibility though the majority consensus is that the MPC will pause for now and set the stage for future rate hikes with a hawkish stance. A rate hike at this stage would be too early. But, the language and tone of the policy will offer clues on the future course of interest rates. Here’s what to look for from the policy document: Inflation remains tricky The MPC would want to assess how the monsoon plays out this year and its full impact on prices across the board. Also, assessing the future trajectory of fuel prices would be key and it would make sense to wait for oil cartel OPEC's meeting later this month to understand the course of global crude oil prices. In its April policy, the MPC had listed several risks to inflation. These included the revised formula for the MSP as announced in the Union Budget for fiscal 2018-19 for kharif crops that may have an impact on inflation, the staggered impact of HRA revisions by various state governments, further fiscal slippage from the Union Budget estimates for 2018-19 or the medium-term path that could adversely impact the outlook on inflation, and, finally, risks to inflation from fiscal slippages at the state level on account of a higher committed revenue expenditure. Is the MPC still bullish on growth? It will be critical to listen to what the MPC says about growth in its policy. In the April policy, the MPC had noted that there are clearer signs of a revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January. Secondly, global demand has been improving, which should encourage exports and boost fresh investment. “On the whole, GDP growth is projected to strengthen from 6.6 percent in fiscal 2017-18 to 7.4 percent in 2018-19 - in the range of 7.3-7.4 percent in H1 and 7.3-7.6 percent in H2 – with risks evenly balanced,” it had said. Nothing much has changed since the last policy on the growth front. But, one needs to see whether the MPC maintains the stance. Expect a message for the govt In the April policy, the MPC said, “in case there is any further fiscal slippage from the Union Budget estimates for 2018-19 or the medium-term path, it could adversely impact the outlook on inflation. There are also risks to inflation from fiscal slippages at the level of states on account of higher committed revenue expenditure." That was a clear cautionary message to the government that it needs to get the fiscal math right. The MPC would want to watch as to how the fiscal situation pans out. It would not be too comfortable if the government fails to stick to the promised fiscal prudence path, and instead turn to populist policies in an election year. What is likely to happen is that the MPC will push a policy statement with a hawkish tone, detailing upside risks to the fiscal scenario ahead. If the policy assumes a hawkish stance , that will not come as good news for the common man as his borrowing rates will certainly go up further. In fact, banks have already begun to increase retail loan rates. This includes the country’s largest lender State Bank of India (SBI), Union Bank, Punjab National Bank and private sector lenders HDFC, ICICI Bank and Kotak Mahindra Bank. Post the latest round of hikes, the SBI’s one-year MCLR stands at 8.25 percent versus 8.15 percent earlier, and ICICI Bank’s start at 8.40 percent.<doc-sep>
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