Rate cut, announcements and commentary on key issues will be closely followed by economists and analysts as the Reserve Bank of India announces its monetary policy on Wednesday.
Here are the five things to look out for as RBI governor Urijit Patel announces the monetary policy:
• Rate cut
The market expects repo rate to be reduced by 25 basis points (bps) to 6%. One bps is a hundredth of a percentage point. The government’s comparatively conservative fiscal deficit target of 3.2% for financial year 2017-18 may prod RBI towards this decision.
Like the last two times, if the RBI chooses to surprise the market once again, it would be imperative to know the regulator’s reasoning behind it.
RBI is aiming to keep retail inflation under 5% in the fourth quarter and 4% within a band of 2 percentage points on either side in the medium term. Economists agree that the RBI’s assessment of the inflation situation will be crucial to understand all future rate movements.
Retail inflation decelerated to a two-year low of 3.41% in December from 3.63% the previous month as vegetable prices continued to fall.
• Demonetisation effect
With little information on demonetisation’s impact on economic growth, it would be crucial to find out what are the consequences of removing 86% of currency notes by value from circulation. Data points about the total deposits acquired by banks during the 50-day period and the number of new currency notes pushed back into the banking system can be expected.
This is the second RBI monetary policy announcement since the scrapping of Rs 500 and Rs 1,000 currency notes.
• MPC decisions
The six members of the Monetary Policy Committee (MPC) have been on the same side of the fence when it comes to decision making on monetary policy. It will be interesting to see if all six votes are in favour of a rate cut or a pause, as economists believe that such a vote would show some dissonance between the way these members thought and voted.
Read | The MPC: lost in translation
• Commentary on sectoral issues
The banking regulator has not made any major announcements around banking sector issues such as capital and asset quality since November 8, when Prime Minister announced the government’s move to demonetise currency. The March 2017 deadline by the RBI under former governor Raghuram Rajan is fast approaching and the banking sector’s bad loan trouble is nowhere close to being solved. Economists will be watching out for the RBI’s commentary on the same.