The six-member monetary policy committee (MPC) led by the Reserve Bank of India (RBI) is likely to hold interest rates steady for the ninth consecutive policy review today.
The central bank, which is caught in a tough battle against a persistently high inflation in the last few years, is yet to bring down the inflation rate to the desired target of 4%. High food inflation remains the major challenge for the regulators as it fights the price rise.
Markets have already priced in a status quo in rates. But, any change in the monetary policy stance (currently withdrawal from accommodation) will signal investors of a change in thinking within the rate setting panel.
There are couple of factors that will be watched closely. The US Federal reserve has signalled a rate cut by September, the Iran-Israel tensions are seemingly worsening and Japan’s decision to hike interest rates has triggered a roller coaster ride in the world markets.
On the positive side, India’s newly elected Government has decided to keep fiscal consolidation plan intact, despite having the luxury of a higher-than-expected RBI dividend bonanza and robust tax collections. From a monetary policy perspective, this is good news.
Time and again, the MPC has underlined that the point at which the panel will look for a rate cut will be when the retail inflation comfortably aligns with the 4% medium-term target. Going by the latest inflation print of June, that’s still some time away.
The RBI is also keeping a close watch on money markets where Rupees is showing signs of weakness and bond yields are waiting for next cues from.the central bank. The RBI has reportedly asked banks not to bet against Rupee in a bid to support the currency.
Inflation has remained the key priority of the MPC in the last two years and even more so after the MPC had to publicly admit it’s failure in inflation management to government two years ago. The rate setting panel is unlikely to lower the guard on inflation till the time inflation eases to the central bank’s comfort zone.
A comforting factor for the MPC is that India’s growth rate remains relatively strong compared with peers, marking 8.2% in the last fiscal year and expected to be around 7-7.5% this year. This means that the central bank doesn’t have immediate pressure to cut rates to support growth.
In the last round, four out of six members in the MPC voted in favour of a status quo in rates or against a rate cut in the last policy review. Two members–Jayanth Varma and Ashima Goyal–voted for a rate cut arguing that holding rates high for too long could hurt growth.
Both Varma and Goyal remain a minority view in the panel.