Despite retail inflation easing to a four-month low in February, and gross value added accelerating in the October-December quarter, the Reserve Bank of India is likely to hold the policy repo rate in its first bi-monthly monetary policy review for FY2019 on April 5 as it expected to be wary of a pick-up in inflation in the first half of the new financial year.

Market experts cite various reasons, including higher minimum support price for kharif (summer) crops announced in the Budget, rising global crude oil prices, and the likelihood of the government loosening its purse strings in the run-up to the 2019 general elections, for the six-member Monetary Policy Committee (MPC) to maintain status quo on the repo rate.

The repo rate, currently at 6 per cent, is the interest rate at which banks borrow funds from RBI to overcome short-term liquidity mismatches. In FY2018, the repo rate was cut only once — in August 2017, from 6.25 per cent to 6 per cent.

The MPC, which meets six times a year, is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level of 4 per cent (+/- 2 per cent) under the RBI Act.

“At this point of time, the RBI is expected to maintain status quo on the policy rate,” said Rajkiran Rai G, Union Bank of India Managing Director and CEO. Given that deposit rates are going up, he felt that bank lending rates will also move up.

In a report, Tanvee Gupta Jain, Economist, and Rohit Arora, Strategist, UBS, said they expect the MPC to maintain the repo rate at 6 per cent.

They elaborated: “We expect the tone of the policy statement to remain cautious while maintaining a neutral policy stance.”

Run-up to the elections

The report flagged the risks due to a higher MSP, which could push up food inflation, the strengthening of global crude oil prices (above $70-75 per barrel), and the risk of populist spending in the run-up to the general election. The report said that if these risks materialise, there is a possibility of a pre-emptive 50 bps hike in the repo rate over the next 12 months to ensure macro stability risks are contained.

Retail inflation eased to a four-month low of 4.44 per cent in February, on the back of softening food prices from 5.07 per cent in January. GVA rose to 6.7 per cent in October-December 2017, against 6.2 per cent in July-September quarter.

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