- Many analysts expect RBI to hike repo rate by 0.25%
- Inflation, MSP hike, rupee weakness are the key reasons, say experts
- Some experts expect a more uncertain outcome
Here are 10 things to know ahead of outcome of RBI policy today:
Economists in a poll by news agency Reuters are almost evenly split over the next rate hike while inflation has been above the RBI's medium-term target of 4 per cent for eight months and is expected to stay that way through to the end of next year.
The 'neutral' stance adopted by the central bank in October 2016 helps it move either way on the benchmark interest rates. A switch to a 'hawkish' would mean more aggressive action on key rates going forward.
Many analysts expect the Reserve Bank of India to bring in a hike of 25 basis points, or 0.25 per cent, in repo rate. A rate hike will be the first move towards a tightening stance in the current cycle, they say.
The key reasons cited by them include:Inflation: Retail inflation (Consumer Price Index) accelerated to a five-month high of 5 per cent in June. That marks a move further away from the central bank's medium-term target of 4 per cent. Headline inflation (Wholesale Price Index) stood at a 54-month high of 5.77 per cent during the month. Minimum support price (MSP) hike: The government last month cleared minimum support prices for 14 kharif crops, a move set to cost nearly Rs 15,000 crore. This may lead to a rise in food inflation, say analysts. Rupee weakness: The rupee is yet to show signs of significant strength against the US dollar. Since the last policy review, it has remained at 68-69 levels against the greenback. On Tuesday, the rupee rose by 13 paise to settle at a two-week high of 68.54. Any commentary on the rupee in Wednesday's policy statement will determine movement of the currency in the coming weeks.
"Rising input prices and currency depreciation indicate build-up of inflationary pressure down the line. The combination of higher government spending ahead of the upcoming elections, its reflationary impact and re-emergence of margin pressure for the manufacturing sector will increase both WPI and CPI headline inflation going forward," said Dhananjay Sinha, head of research, economist and strategist, Emkay Global Financial Services.
Increasing global trade restrictions and tariff hikes can lead to further inflationary pressure, said Mr Sinha, who expects the RBI to hike the repo rate by 25 bps in today's statement.
Suvodeep Rakshit, senior economist, Kotak Institutional Equities, also expects the 25-basis-point hike. "Even as we call for a rate hike, the RBI may pause mainly to wait-and-watch if MSP (minimum support price) hikes start to percolate to food prices and how the inflationary expectations have evolved over the last quarter," he said.
Others expect a more uncertain outcome from the RBI monetary policy statement today.
"While market is discounting a rate hike we believe it is a touch-and-go matter with almost even probability of rate action. RBI may continue to focus on inflation, fiscal deficit and global geopolitical uncertainties. Crude oil prices and currency volatility may also dominate RBI's mind-space," Killol Pandya, head fixed income, Essel Mutual Fund, told NDTV. He expects the RBI's tone to "remain neutral to hawkish".
The RBI had in its June policy review raised its inflation projection for the second-half of fiscal year 2018-19 to 4.7 per cent from 4.4 per cent. Analysts will monitor any further changes in the central bank's inflation projection for the year. (With agency inputs)