RBI policy: Central bank likely to keep rates unchanged, 5 points to know

The Reserve Bank of India would likely to keep key rates unchanged at six per cent today. The decision may come despite the fact the inflation is above its medium-term target. 

According to a Reuters poll, a majority of economists also expect the central bank's tone to turn hawkish in its latest policy decision. The Central bank's decision would be announced at 2:30 pm today. 

Retail inflation hit a 17-month high of 5.21 per cent in December. 

The February policy announcement is the first after the Union Budget 2018 was tabled before the Parliament on February 1. 

The policy announcement would also come amidst the global meltdown in the stock markets. 

1. While retail inflation hit a 17-month high in December and is expected to remain above the RBI’s 4 per cent target over the coming 12 months, growth in Asia’s third-largest economy likely slowed markedly in the fiscal year ending March 31, complicating the RBI’s policy path.

2. In a move that could push inflation higher in coming months, Finance Minister Arun Jaitley increased government spending for rural areas and announced a larger fiscal deficit target in his annual budget speech last week.

3. “Inflation is rising and the government has also deviated from the fiscal consolidation path outlined earlier. Clearly, the pressure is building on the RBI to hike rates. However, we expect a status quo in the near-term,” told Tushar Arora, senior economist at HDFC Bank to Reuters. 

4. The RBI has held the repo at 6.0 per cent since a 25 bps cut in August, having taken advantage of a period of extraordinary low inflation to cut rates by 200 bps since early 2015.

5. Although any move to raise rates could make yields more attractive overseas, it could also undermine confidence in the economy, adding more uncertainty to monetary policy.

However, minutes from the RBI’s December policy meeting showed policymakers were increasingly worried about inflation.

In recent months, rising energy prices have pushed up the inflation rate and the government’s decision to increase healthcare spending and raise the minimum support price for agricultural produce by 1.5 times will add to escalating price pressures.

Shashank Mendiratta, economist at ANZ, said the fiscal stance for 2018-2019 “will add to the hawkish rhetoric on two counts - the budgetary decision to allow aggregate spending to rise at a faster pace than nominal GDP; and the decision to effect an increase in minimum support prices.”

(with inputs from Reuters)