The three-day meeting of the RBI’s Monetary Policy Committee is concluding on Wednesday (June 8) and the six-member rate-setting panel will announce its decision on the interest rates in the country. Almost all experts and economists said the MPC will decide to raise the repo rate given the high inflation in the country. RBI Governor Shaktikanta Das has also said the expectation of a rate hike is a no-brainer. Here’s what you need to watch out for in the central bank’s latest bi-monthly monetary policy:
Repo Rate Action
The MPC will most probably increase the key policy rate to control inflation. Economists differ from a 25-basis-point repo rate hike to a 50-basis-point increase in the repo rate.
Apart from this, experts also said the central bank is likely to raise the cash reserve ratio (CRR) in one of the upcoming policies but will be contingent on how it sees the durable liquidity panning out in the next few months.
The repo rate is the rate at which the RBI lends money to commercial banks, while the CRR is the percentage of cash that banks need to keep in reserves vis-à-vis their total deposits.
In an off-cycle monetary policy review, the RBI’s MPC last month raised the repo rate by 40 basis points to rein in inflation. In the April policy review, the Committee had maintained the status quo on the key policy rate to keep it at four per cent.
Monetary Policy Stance For Future Policies
The policy stance of the MPC will be the key to watch out for, as the future policy actions of the RBI will depend on this. In the off-cycle policy review last month, the MPC had retained its ‘accommodative’ monetary policy stance.
Asutosh Mishra, head (research- institutional equity) at Ashika Group, said, “We expect the policy rate stance to change to Neutral from current accommodative.”
Amid high inflation in the country, the Reserve Bank of India’s commentary on inflation will be the key focus area. The RBI is mandated to keep inflation within the range of 2-6 per cent. The retail inflation in April stood at an eight-year high of 7.79 per cent, forcing the RBI to hike interest rates in the off-cycle monetary policy last month.
In the April MPC meet, the RBI had revised upwards its retail inflation forecast to 5.7 per cent for the current financial year 2022-23, as compared with the 4.5 per cent projected earlier. It had also said if crude oil prices remain above $100 per barrel, inflation may increase further. Currently, Brent crude is hovering around $120 per barrel. However, India is also in talks with Russian companies to buy cheaper oil.
In the April 2022 bi-monthly monetary policy review, the RBI had revised downwards its GDP growth projection for the current financial year to 7.2 per cent, compared with the 7.8 per cent forecast earlier. Its Governor Shaktikanta Das said “escalating geopolitical tensions have cast a shadow on our economic outlook”.
Now, according to the latest data, India’s gross domestic product (GDP) grew 4.1 per cent in the fourth quarter of the financial year 2021-22, which was lower than the 5.4 per cent recorded in the previous quarter. During the January-March 2022 quarter, manufacturing saw a contraction of 0.2 per cent quarter-on-quarter.
Sharad Chandra Shukla, director of Mehta Equities, said, “We assume the RBI will be more focusing on controlling inflation, and growth won’t be the priority at this juncture. The central bank is likely to keep the GDP forecast unchanged.”
Apart from these, other key announcements related to loans, cryptocurrencies, liquidity, etc, if any, will also be watched out for.
In the April policy review, the RBI had proposed to make the cardless cash withdrawal facility available across all banks and ATM networks using the Unified Payment Interface (UPI). It had also proposed to reduce the net worth requirement of such entities from Rs 100 crore to Rs 25 crore, apart from saying that it will rationalise the risk weights and continue to link home loans only with loan-to-value (LTV) ratios for new home loans till March 31, 2023.