When the six-member Monetary Policy Committee (MPC) of the Reserve Bank takes a final call on a possible rate cut, their decision will depend on the funds situation at Indian banks post-demonetisation and a firming up of global oil prices.
While expectation is running high of a 25 basis point rate cut on Wednesday, here are the factors that could hold RBI governor Urijit Patel back from announcing a cut:
Impact of demonetisation:
The consumer price index ( CPI) or retail inflation fell from 2.59% in November to 2.23% in December. It could cool further. But these falling numbers should be seen from the perspective of the squeeze in demand following demonetistaion. The RBI could weigh in the caveat: once the economy is adequately remonetised the impact on inflation will ease.
Oil prices have been on the rise ever since the petroleum exporting countries decided to freeze production. Upward-bound oil prices will push inflationary trends up. Along with oil, there are also expectations that global commodity prices will also see a spike in 2017.
Rising oil prices present a challenge to India’s growth, said the Economic Survey presented in Parliament earlier this week. “Price of crude oil (Indian basket) has increased from $39.9 in April 2016 to $52.7 in December 2016. For the next financial year, the recent uptick in global commodity prices, in particular crude oil prices, pose an upside risk,” it said.
US monetary policy:
The current interest rate effected by the US Federal Reserve at 0.75% shows signs of inching up. And there are expectations of a few hikes in 2017. This does not bode well for India, as a US rate hike will see dollar funds flee emerging markets. A revival of the US economy will strengthen the dollar putting pressure not only on the Indian rupee but also on the Indian exports.