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RBI likely to harden monetary policy stance on Wednesday

Author: IANS/Tuesday, July 31, 2018/Categories: Regulatory

RBI likely to harden monetary policy stance on Wednesday

Mumbai - With retail inflation in India having regained the 5% mark, the RBI Monetary Policy Committee (MPC) began its extraordinary three-day consultations on Monday for the second time before an announcement of its bi-monthly policy review slated for Wednesday.

A similar three-day meeting of the Reserve Bank of India's (RBI) MPC had preceded the previous policy review in June when, breaking the cycle of rate cuts begun in January 2015, the RBI raised its key interest rate for the first time by 25 basis points (bps) to 6.25%, responding to concerns on inflation from surging global crude oil prices. 

The MPC had earlier always met over two days before the policy announcement. 

In June, the six-member MPC voted unanimously for the rate hike that the central bank was undertaking after more than four years and came for the first time under the Modi government. 

Retail inflation in India touched the 5% mark in June, compared to 4.87% in May and has gone beyond the RBI's revised inflation projection of 4.8-4.9% for the first half of the current fiscal.

The higher inflation last month comes in the backdrop of rising global crude oil prices which have been ruling at over $75 a barrel.

At the time of revising upwards its projection for the fiscal's first half during the June policy review, RBI Governor Urjit Patel noted that inflation had remained above the central bank's medium-term target of 4% for more than six months.

The RBI, however, maintained its 'neutral' stance on policy, as it had done over four previous policy reviews when it held the repo, or its short term lending rate for commercial banks, at 6%. This stance allows the RBI to move either way on rates.

In the current scenario, given also that industrial output growth fell in May at 3.2%, as compared to rise of 4.9% in April mainly on account of a decline in manufacturing, analysts are divided on the extent to which RBI will harden its stance on Wednesday. 

"On the RBI policy, the markets are divided on policy rate hike in the next weeks meeting. The decision weightage given by MPC to core inflation is crucial and whether RBI changes its stance from neutral to hawkish," said Devendra Nevgi, Founder and Principal Partner, Delta Global Partners.

"RBI is likely to be data dependent and cautious on hikes," he added.

Complicating the situation for the RBI is the fact that interest rates in developed markets were rising after a prolonged period of very low rates. The US Federal Reserve increased its funds rate in June by 25 bps to a target range of 1.75-2%.

The European Central Bank and the Bank of Japan are also in the process of hardening their monetary policy stance. 

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