The monetary policy committee (MPC) of the Reserve Bank of India (RBI) will keep the repo rate unchanged on Wednesday. It would wait to see the actual progress of the monsoon and the adjustment during the transition to the goods and services tax (GST) rollout.
However, the tone of the policy statement is expected to be far less hawkish than the April
2017 statement, given that some inflation risks have receded.
In the last two policies, in February and in April respectively, the RBI was wary of inflation and kept the repo rate unchanged. In the February policy, the central bank shifted its credit stance from “accommodative” to “neutral.”
However, in its April monetary policy review, it surprised by hiking the reverse repo rate by 25 basis points (bps) to 6 per cent to drain out the excess liquidity, which had piled up in the banking system post demonetisation.
Said Jay Shankar an independent economist, “I expect a status quo in the policy as the RBI is likely to wait and watch for more clarity on monsoon and GST roll out. The RBI has announced a neutral stance in the last policy and is unlikely to add to the uncertainty to investors by reversing the stance now.”
Pointed out Soumya Kanti Ghosh, group chief economic advisor at State Bank of India: “I expect status quo this time. The RBI is likely to sound less hawkish as inflation trajectory is expected to remain significantly benign. Growth remains weak and is expected to pickup only gradually. However, I do see outside chances of a rate cut in August.”
The six-member MPC headed by RBI governor Urjit Patel will meet on June 6 and 7 for the second bi-monthly monetary policy statement for 2017-18.
The CPI inflation has remained below 4 per cent i.e. the medium term target, for six consecutive months.
Moreover, several inflation risks highlighted by the MPC in April 2017 have subsequently abated, with improved outlook for the monsoon, rate structure of the goods and services tax (GST) and easing of commodity prices.
The CPI (retail inflation) announced for the month of April 2017 came in sharply lower at 2.99 per cent, compared to 3.89 per cent for the month of March 2017 and overall CPI inflation at 5.47 per cent in April last year.
This fall in CPI inflation has also been driven by a very sharp decline in food inflation. In fact, food inflation for the month of April has touched a low of 0.61 per cent, largely assisted by negative inflation in pulses and vegetables.
On the same lines, the WPI eased to 3.85 per cent for April compared to 5.29 per cent in March 2017.
Over the last 8 months, WPI inflation has been consistently in the positive territory, which has obviated the risk of deflation and a slowdown in the economy.
The base year for the calculation of WPI has shifted from 2004-05 to 2011-12, making it more comparable with the other key economic parameters.
The central statistical office (CSO) recently came out with the gross domestic product (GDP) estimates for Q4 (Jan-Mar 2017) and full fiscal 2017.
This is the first GDP release incorporating the new 2011-12-based WPI and IIP series. Contrary to the consensus expectation of a rise in real GDP growth – both on account of higher IIP and lower WPI in the new series – the real GDP growth for fiscal 2017 clocked 7.1 per cent, unchanged from its earlier estimate due to the impact of demonetisation and the fact that the deflator in Q4 had risen sharply.
For fiscals 2015 and 2016, GDP growth was notched up, as the newly estimated IIP growth and deflator (2011-12 base) were favourable compared to earlier estimates.
However, different components of the GDP in fiscal 2017 did see their growth estimates changing on both the demand and the supply side. GST, which government intends to roll out from July 1, is likely to be inflation neutral as per official estimates.
“Growth projections, meanwhile, could get a lift from the re-based wholesale price index and industrial production series.
