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RBI monetary policy: Here’s why governor Urjit Patel may not announce rate cut

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 on global cues. While expectation is running high of a 25 basis point rate cut today, here are the factors that could hold RBI governor Urijit Patel back from announcing a cut:

business Updated: Feb 08, 2017 13:37 IST
Suchetana Ray
The Reserve Bank of India governor Urjit Patel announce a rate cut today?
The Reserve Bank of India governor Urjit Patel announce a rate cut today?(Reuters)

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.

Global cues:

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.