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RBI monetary policy: Rate cut to depend on demonetisation and global cues

The Reserve Bank of India (RBI) is expected to hold key interest rates at its monetary policy review - its second after November’s note ban - in the wake of banks being flush with funds post-demonetisation and a firming up of global oil prices.

business Updated: Feb 06, 2017 13:17 IST
HT Correspondent
HT Correspondent
Hindustan Times
RBI,monetary policy,demonetisation
People walk past the Reserve Bank of India (RBI) head office in Mumbai.(Reuters)

When the six-member Monetary Policy Committee (MPC) of the Reserve Bank meets on February 7 and 8, their decision on a possible rate cut will depend on the funds situation at Indian banks post-demonetisation and a firming up of global oil prices.

As a result of the surge in bank deposits following the recent demonetisation of high-value currency, lending rates have fallen by up to 1%.

According to a survey by Mint, seven out of 10 bank economists expect RBI to cut its repo rate by 25 basis points to 6%. The other three expect the repo rate to remain unchanged. Slowing inflation and a fiscally responsible budget may sway the RBI, feel economists.

Earlier in December, the RBI’s Monetary Policy Committee (MPC), during its second bi-monthly monetary policy review -- the fifth of the fiscal -- kept the repurchase rate, or the short-term lending rate it charges on borrowings by commercial banks, unchanged at 6.25%.

According to the panel, its decision to keep the key lending rates unchanged was taken after considering various global and local factors, such as a likely hike in the US interest rates, which has since been effected by the US Federal Reserve.

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.

While announcing its monetary policy review last month, the RBI, acknowledging the demonetisation factor, lowered its gross value added growth estimates for the current fiscal to 7.1% from 7.6% forecast earlier.

Meanwhile, with a key macroeconomic data showing services sector contracting for the third straight month in January, also provoked expectations of a rate cut by the RBI.

The Nikkei Services Purchasing Managers’ Index (PMI) survey showed that input cost inflation slowed since December, while average selling prices contracted again, which may prompt the RBI to be “accommodative” at its forthcoming monetary policy review.

First Published: Feb 06, 2017 13:16 IST