RBI expected to keep rates unchanged on Thursday

Reserve Bank of India

The Reserve Bank of India (RBI) is expected to maintain its key lending rates at its first bi-monthly monetary policy review of this fiscal due on Thursday.

At its last policy review of the previous fiscal in February, the RBI had kept its repo or short term lending rate for banks unchanged at 6.25 per cent, saying it awaits more data on inflation trends and the impact of demonetisation on economic growth.

At the February review, India’s central bank also shifted its monetary policy stance from accommodative to neutral citing inflationary fears and global uncertainties.

“We are maintaining status quo on repo rate in April policy,” said a state-run State Bank of India report authored by Chief Economic Adviser Soumya Kanti Ghosh.

“In the post demonetisation period, aggregate deposits have increased by Rs 4.27 lakh crore. Our estimates now indicate there would be a permanent liquidity injection of least Rs 1.7 lakh crore or 1.1 per cent of GDP,” Ghosh said.

“Hence, it is now important to innovate a mechanism to manage such liquidity. We strongly recommend the RBI avoid disruptive modes of liquidity absorption like CRR (cash reserve ratio) hike,” he said.

Expectations that the RBI will maintain status quo on rates has been fuelled by inflation numbers, with wholesale inflation soaring to over a three-year high of 6.55 per cent in February while retail inflation climbed to 3.65 per cent due to rise in food and fuel prices.

Noting that excluding food and fuel, inflation has been unyielding at 4.9 per cent since September 2016, the RBI said: “The committee is of the view that the persistence of inflation excluding food and fuel could set a floor on further downward movements in headline inflation and trigger second-order effects.

“It is important to note three significant upside risks that impart some uncertainty to the baseline inflation path — the hardening profile of international crude prices; volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowances under the 7th Central Pay Commission.”

The average level of retail inflation in 2015-16 was at 4.9 per cent.

Addressing reporters here following the last policy review, RBI Governor Urjit Patel said the decision to hold rates was taken in context of the “highly uncertain conditions” created by the impact of demonetisation.

“There is a shift in the stance of monetary policy from accommodative to neutral that would allow room to manoeuvre in either direction,” Patel said.

Meanwhile, a key macro-economic data showed on Monday that India’s manufacturing sector expanded in March due to healthy demand conditions and softer inflationary pressure.

The Nikkei India Manufacturing Purchasing Managers’ Index (PMI), which is a composite indicator of manufacturing performance, rose to a five-month high of 52.5 in March, from 50.7 reported for February.

An index reading of above 50 indicates an overall increase in economic activity and below 50 an overall decrease.