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RBI’s Policy Review: Experts Opine

We bring you experts’ views and expectations on what to expect from RBI’s credit policy this time ahead of its monetary policy announcement on October 5

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As the 4th Bi-monthly Monetary Policy Statement for 2018-19 will be announced by Reserve Bank of India (RBI) on October 5, 2018, all eyes are on the policy rate announcement this time as the macroeconomic situation is going through an upheaval in India and world alike. We bring you experts’ views and expectations on what to expect from RBI’s credit policy this time. 

What to expect? Let’s find out:

Dr. Arun Singh, Lead Economist, Dun & Bradstreet – India 

Will RBI increase or decrease interest rates?

Given the inflationary and rupee depreciation pressures, another rate hike by the RBI this year cannot be ruled out. While most of the time RBI has surprised the market with its move, however, in the upcoming monetary policy meeting, there is likely to be a pause in the rate hike cycle. It is imperative that RBI maintains status quo in the upcoming policy review. This is primarily because even though there are upside inflationary pressures, the inflation rate has not surged across all commodities. Currently, inflation remains within the RBI’s target range and is expected to remain moderate till Nov 18 driven by the base effect. The upside inflationary pressures from rising global crude oil prices and imported inflation owing to rupee depreciation remain. Core inflation remains high signaling rising input costs and improving demand.

 The other deterrent to the policy rate hike could be the high borrowing costs for companies. Post the RBI's double policy rate hike, bank lending rates have started moving up. With bank credit to industries growing at an average of 1 per cent since Nov 2017 and credit to exporters growing negatively for 15 consecutive months, the funding scenario for corporates is not optimistic. Bond yields have increased sharply and the average call money rates are highest since Nov 2016. Corporates sourcing funds from global markets are facing higher lending rates. And a weak rupee has added to the borrowing woes of corporates sourcing funds globally.

 What will be its stance- Hawkish or neutral?

RBI’s stance likely to be neutral and more data-driven. RBI might wait till full impact of monsoon is visible

Will US Fed Reserve Policy outcome have any bearing on RBI's policy decision?

Globally, the dollar has strengthened and interest rates have moved up. Any further rate hike by the US Fed would add to the policy rate hike pressures, but a wait and watch policy can be adopted in the near term as the Central bank pursues a inflation targeting policy.

Sudip Bandyopadhyay, Group chairman, Inditrade Capital 

Will RBI increase or decrease interest rates?

There certainly seems to be no impetus to reduce rates, since the economy is demonstrating strong growth and inflation has cooled. At the same time, the RBI may not want to burden corporates, which are already struggling with rising crude prices and a falling rupee, so it may not relish the idea of raising rates.  

However, with the global scenario deteriorating due to high-pitched trade and diplomatic gambits by the US and the rupee is still facing downward pressure, raising rates is an option that the central bank will consider. More importantly, US Fed is expected to hike rates once/ twice during the residual part of this calendar year.

All things considered, the MPC is most likely to raise rates in measured tranches with a slim chance of keeping them steady for now.

 What will be its stance- Hawkish or neutral?

For the first time in over four and a half years, the RBI raised the repo rate in two consecutive bi-monthly Monetary Policy meetings (June and August 2018), by 25 basis points each time, bringing it to 6.5 per cent, meanwhile, short-term rates (as captured by the 91 day T-bill) have been rising since April 2018 while long-term rates (as reflected by 10 year bond yields) have been on a rising trend for over a year. So, it appears that the market is gearing itself for a rising interest rate scenario. Accordingly, it would be inapt to term any measures by the RBI to raise rates as “Hawkish” since it stems from defensive rather than offensive motives. Then again, assuming that it is likely to raise them in measured tranches, the approach cannot be described as neutral either. I would venture to describe the RBI's approach as ‘calculated and calibrated', as it moves towards meeting its long and short-term monetary policy targets.

Will US Fed Reserve Policy outcome have any bearing on RBI's policy decision?

The policymakers at the FOMC have raised the benchmark rate by 0.25 per cent, the eighth rate rise since 2015 and have also hinted at more rate hike before the end of the year while signalling three rate hikes in 2019. These rate hikes are likely to trigger a flow of capital to the US, from India and other hitherto attractive investment destinations, over the next couple of years. To that extent, the RBI will have to adjust its monetary policy to ensure that liquidity does not become an issue domestically and the current growth momentum is maintained.

Sridhar AK, Director & CIO, IndiaFirst Life Insurance

Will RBI increase or decrease interest rates?

They might consider an increase of 25 bps points, which is quite possible looking at the macro situation such as crude oil prices, the rupee-dollar rate, fiscal deficit, inflation etc. All these factors indicate that rates should be increased however, the RBI will be cautious while revising it. 

What will be its stance- Hawkish or neutral?

The RBI will maintain a stance of wait and watch while it will closely monitor all developments nationally as well as internationally and then decide on a course of action.

Will US Fed Reserve Policy outcome have any bearing on RBI's policy decision?

It would have an implication to the extent of FPIs inflows in the debt markets which have dried down and even witnessed withdrawals and we foresee this trend to continue. The only action we expect the RBI to take is to ensure more inflow of money in India through NRI route as it did in 2003. It would help in two ways, firstly, it will offset the money outflow by the FPIs and secondly, it will bring dollars in the country.

Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance Company

Will RBI increase or decrease interest rates?

In the current environment, with crude oil prices rising, and the rupee under pressure, the probability of a rate hike in October policy review has increased. Even though the central bank has already gone in for two consecutive rate hikes in June and August, we feel that another pre-emptive rate hike is likely in the current environment, despite the recent moderation in inflation. 

What will be its stance - Hawkish or neutral?

We feel that RBI will choose to retain its policy stance at ‘neutral’, and leave the window open for further policy action, depending on developing data. Another point to note here is that RBI monetary policy is inflation-targeting, and headline inflation has come below the 4 per cent mark in August, primarily due to fall in food inflation and also on the back of moderation in core inflation. This recent fall in inflation should provide some comfort to the central bank, and therefore we feel that future policy action will continue to be data dependent. 

Will US Fed Reserve Policy outcome have any bearing on RBI's policy decision?

The US Fed’s policy action has pretty much been along expected lines with the 25 bps rate hike recently, and guidance of 4 more rate hikes through 2019 (1 more hike in 2018 and 3 rate hikes in 2019). The RBI has been cognizant of this in its own monetary policy, and the gradual withdrawal of dollar liquidity that Fed’s action is having—leading to global strength in the dollar. 

Prerna Mukharya, Founder Outline India 

Will RBI increase or decrease interest rates?

At the moment I expect at least one – if not two – upward rate revisions before the end of this fiscal year. You will likely see a 25 basis point hike in the repo rate in October from a cautious RBI and another similar hike in December. 

What will be its stance- Hawkish or neutral?

Definitely hawkish. Because of external factors like a strong US dollar the rupee’s value is stressed and this will translate into high energy import bills and could uncomfortably nudge the RBI’s comfort level with inflation. At the moment I expect the RBI to adopt a hawkish stance. 

Will US Fed Reserve Policy outcome have any bearing on RBI's policy decision?

No and yes. The Fed was expected to raise interest rates, and it did nothing different from what it had been saying all along. Given that it was expected I think the markets may have adjusted for a stronger dollar. But what will be interesting to see will be how much pain will the RBI be willing to tolerate and whether it would be willing to intervene and ease short-term pressure in the market.