RBI to announce the bi-monthly policy for the current fiscal

RBI New BI-Monthly Policy

RBI New BI-Monthly Policy

The newest macro-economic information of India has shown that inflation in the country is now at a record low, the likes of which have never been seen before. Similarly, the levels of factory production in the country have fallen as well. It is expected that in light of this situation Reserve Bank of India (RBI) will be reducing its repo rate. Repo rate is basically the short-term lending rate used by the apex banking body of India for loans provided to commercial banks. This is expected to be done when RBI reviews its monetary policy on August 2. When RBI had done its second bi-monthly policy review for the ongoing fiscal on June 7 it had settled for a status quo on this repo rate.

Reasons for repo rate changes

At that time the repo rate had stayed at 6.25%. RBI in its policy statement issued at that time had stated that its Monetary Policy Committee (MPC) consisting of six members had taken the decision based on the risks to inflation. During June 2017, retail inflation in India dropped to 1.54%, a record low. At the same time, data on industrial production showed that growth in factory production had gone down to 1.7% during May 2017. In May 2016 this rate had been estimated at 8%.

How much would be cut?

It is expected that on August 2 RBI would reduce its main policy rate by at least a quarter percentage point. This would make it the lowest such rate in the last six and a half years, from November 2010 to be exact. The main question that needs to be asked at this juncture is whether the central bank, which has been cautious so far, would show any readiness to ease more in case the situation demands so. In a recent poll done with 56 economists by Reuters, 40 predicted that RBI will reduce its repo rate by 25 basis points with the new rate becoming 6%.

Could anything become cheaper?

The fact that the repo rate would be cut was already expected by the likes of Kunal Kumar Kundu, Societe Generale, who has stated that RBI has been caught unaware by the sharp reduction in inflation of late. The situation has been further exacerbated by factors such as normal monsoon, weak capacity utilization, declining prices of crude oil, and the strong situation of the Indian National Rupee (INR). This is the reason why headline inflation has gone down.

RBI monetary review

The MPC of RBI, led by RBI Governor Urjit Patel, has started on August 1 a two-day long deliberation for its monetary policy review. All the stakeholders of Indian economy are presently waiting for the results of this meeting including stock markets and various industries. The prices have improved significantly of late and encouraged by this trend bankers are expecting RBI to change its stance on fiscal issues. They are anticipating that the benchmark lending rate would be cut by a minimum of 0.25%. Some are however expecting an even more aggressive stance from the apex banking body of the country given how low inflation has been of late.