The Reserve Bank of India is likely to keep the repo rate unchanged at 6.50 per cent in its fifth bi-monthly monetary policy review on December 5 in the backdrop of retail inflation declining to a one-year low in October and the GDP growing at a slower-than-expected rate in the second quarter.
The central bank is expected to persist with its calibrated tightening stance in view of possible upside risks that could arise down the line as a result of pass-through of minimum support price hikes for agriculture commodities, reversal in the current soft global crude oil prices, volatility in the global financial markets and possible fiscal slippage, among others. Given the current benign retail inflation scenario and expectation of it undershooting the RBI’s projection of 3.9-4.5 per cent in the second half of FY19, economists see the RBI maintaining a status quo on the repo rate for the rest of the current financial year.
Retail inflation declined to a one-year low of 3.31 per cent in October (against 3.7 per cent in September and 3.58 per cent in October 2017) due to a dip in food inflation on account of a drop in the prices of vegetables and pulses.
GDP growth at 7.1 per cent in the second quarter (July-September 2018) was slower than expected despite a favourable base (6.3 per cent in the year-ago quarter). Economists expected the growth to be around 7.5 per cent in the second quarter.
In the four bi-monthly monetary policy reviews so far in FY19, the RBI has upped the repo rate twice by 25 basis points each in June (6 per cent to 6.25 per cent) and August (6.25 per cent to 6.50 per cent). In the October policy review, the RBI changed its policy stance from “neutral” to “calibrated tightening”.
IL&FS crisis
The six-member monetary policy committee (MPC) is seen taking stock of the liquidity crunch being faced by some non-banking finance companies in the backdrop of the IL&FS imbroglio.
“The RBI may get the much-needed elbow room to keep the policy rate unchanged in the forthcoming fifth bi-monthly policy review on December 5. If the current trend of growth-inflation mix continues, a rate hike in the current fiscal is ruled out,” said Devendra Kumar Pant, Chief Economist, India Ratings and Research.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, said the MPC is likely to keep the repo rate unchanged besides maintaining the stance at “calibrated tightening”.
Suvodeep elaborated: “The MPC will likely deliberate on the liquidity (overall and sectoral) issue though it is not under its ambit to address these issues completely. It will likely keep the CRR unchanged.”