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RBI likely to hold rates, give fillip to GDP growth

Cooling oil prices, dovish Fed, strong rupee give more room for pause

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Urjit Patel
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Reserve Bank of India (RBI) is unlikely to hike interest rates when it unveils its monetary policy on December 5 as it draws comfort from subdued inflation and falling global oil prices.

The central bank will also want to push up the economy at a time when gross domestic product (GDP) growth for the quarter ended September slowed to 7.1% as compared to 8.2% in the trailing quarter. 

In the last policy in October, RBI had also held on to interest rates after hiking them in its August review.  

The six-member Monetary Policy Committee (MPC), headed by RBI governor Urjit Patel, will meet for three days starting today for the fifth bi-monthly monetary policy review. 

“MPC will be dovish on interest rates. Consumer price inflation (CPI) is soft, oil prices have come down, GDP growth has slowed, central banks globally (especially US Federal Reserve) seem to have softened and markets are looking more well-behaved. All put together, they are likely to bring down CPI forecasts, maybe even relook at GDP estimates and indicate dovishness. They could consider changing the stance back to neutral. But given they have just changed the stance two months ago, they could indicate that markets, particularly oil prices, have changed dramatically. If this dip persists, they will keep all options open,” said Ananth Narayan, professor, SP Jain Institute of Management and Research.

Since the last RBI policy in October, there has been a 30% slide in global oil prices. Inflation in October was at 3.3%, the lowest since September 2017, helped visibly by a sharp drop in prices in pulses and vegetables. 

In the last policy review, RBI had taken a benign view on inflation by bringing down its CPI forecast for the second half by 60 basis points to 4.2%.  

“RBI will hold rates. There are few very clear factors that point to a pause in interest rate hikes,” Ashutosh Khajuria, executive director, Federal Bank, said. 

Interest rates are expected to remain steady in the US after Federal Reserve chairman Jerome Powell said that they are “near neutral” and hinted that the number of hikes will be lower than the earlier anticipated. 

“The US treasury yields have now come down to 2.9% from 3.04% levels, which will keep emerging markets such as India an attractive destination to invest. Inflation is below RBI’s targeted rate of 4%, oil prices have fallen and the rupee has emerged strong. These are the broad factors that press for a status quo in interest rates,” said Khajuria.


With Reserve Bank of India announcing an injection of Rs 40,000 crore into the system in December through open market operations (OMO), the Monetary Policy Committee (MPC) will most likely vote to keep the liquidity comfortable to fund an improved credit growth. Some treasury experts say there is now room for RBI to pause for the remaining part of the financial year 2018-19.

“With a 30% slide in crude oil prices since the last policy review, concerns around the current account deficit as well as BoP (balance of payments) have broadly eased. Indian rupee has reversed course and has strengthened meaningfully. And with the rupee stable/strengthening, the Reserve Bank of India gets enough wiggle room to address liquidity tightness through FX (foreign exchange) purchases or OMOs,” said Edelweiss Securities in a report.

However, the volatility in global oil prices, impact of the hiked minimum support price (MSP) and the possibility of a fiscal slippage in an election year will continue to be issues of concern in RBI’s watch list. 

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