The Reserve Bank of India (RBI) is widely expected to keep the repo rate or key policy rate unchanged at 6 percent on Wednesday citing higher inflation risks and weak credit demand.
"On the eve of the forthcoming monetary and credit policy, the central bank is stuck in a conundrum of low growth, mild inflation, saving financialization and external uncertainties. This will make the job difficult for RBI on October 4," said a State Bank of India (SBI) note by its chief economic adviser Soumya Kanti Ghosh.
Since RBI’s last rate cut in the previous meeting in August, Consumer Price Index (CPI) inflation has scaled higher by about 200 basis points (bps) to 3.36 percent in August, though on expected lines, to reach a five-month high.
Further, cumulative headline rainfall during the 2017 monsoon season, at around 95 percent of the long-period average, is marginally below the “normal” range of 96-104 percent.
However, driven by food inflation, it is likely to be reversed sooner and despite an upward blip, it is expected to remain in the target range of 4 percent (+/- 2 percent) for a longer term.
“I am pretty sure that they will maintain a status quo citing risks to inflation from likely upticks in food and fuel inflation plus GST (Goods and Services Tax) and HRA (house rent allowance) effect. But these are essentially cost push pressures and no indicator at present is suggesting any improvement in aggregate demand,” said Rupa Rege Nitsure, Group Chief Economist, L&T Financial Services.
Additionally, she said, “Growth slowdown is very acute. In view of this, I want them to lower rates at least by 25 bps, lower their GDP growth estimate by 50 bps and change the policy stance to accommodative. This will be supportive of the borrowing programmes of at least sound companies in H2, FY18.”
Given the falling growth rate and drag on the economic activity in the first and second quarter, the central bank’s forward guidance on growth and inflation would be worth noting.
Further, despite signs of a slight uptick in inflation for the reasons above and the GDP (gross domestic product) growth falling to a three-year low of 5.7 percent in the first quarter of the fiscal, there have been demands of further lowering of the key lending rates.
Nevertheless, there has been weak demand for credit amid slowdown in business growth.
RBI Governor Urjit Patel has also met Finance Minister Arun Jaitley before the monetary policy review to discuss the macro-economic issues amid rate cut demands to boost the sagging growth.
The SBI note also said, "Currently, there are other challenges, too, like an uncertain global environment and weak growth. In particular, the external environment looks a little bit wobbly compared to what it was at the beginning of 2017. For example, a notable feature of current capital flows is the continuing importance of external debt. Total external debt stocks of developing countries (including India) and economies in transition are estimated to have reached USD 7.1 trillion in 2016, an overall increase of 80 percent since 2009. No wonder, rupee is currently witnessing depreciation pressures."
In its August policy review, the RBI had reduced the repo rate by 25 basis points to 6 percent.
The six-member monetary policy committee (MPC) headed by Patel will meet for two days on October 3 and 4 in Mumbai to deliberate on the fourth bi-monthly monetary policy statement for 2017-18.
“The resolution of the MPC will be placed on the website at 2.30 pm on October 4, 2017,” RBI said.