When the Reserve Bank of India (RBI) decided to hike policy repo rate by 25 basis points to 6.25% from previous 6% in June policy, experts were of the opinion that similar action is going to continue for another two policies. However, two opinions have now emerged. There is a section of analysts that believes the RBI will decide to maintain a status quo in August policy, which is scheduled for today at around 1430 hours, another section still reiterates that a rate hike is on cards. The RBI meet, comprising  six-member Monetary Policy Committee (MPC), will be chaired by RBI Governor Urjit Patel .  

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Patel and six-member of MPC have been meeting since July 30 to take a call on August policy. Ahead of this, markets are trading on a volatile note, as currently they have given away their early hours gain with Sensex trading at 37,569.68 down by 36.90 points or 0.10% at around 1125 hours, whereas Nifty 50 muted in red at 11,355.65.

The latest poll by Reuters shows a small majority (37 out of 63 analysts polled) agree with us that rates will be hiked. 22 analysts think that rates will next be hiked in either October or December.

Whether RBI hikes policy repo rate or not, here’s list of 11 factors that will be surrounding the central bank’s decision. 

CPI Inflation 

India's retail inflation for month of June has gone up to 5 per cent compared to 4.87% in May 2018, according to government data released by the Central Statistics Office today. Driven by higher fuel prices and a depreciating rupee, the forecasts for June ranged from 4% to 6%.  

June was the eighth straight month in which inflation was higher than the central bank`s medium-term target of 4%, said a Reuters report.

tradingeconomics.com

WPI Inflation 

The Wholesale Price Index (WPI) inflation for the month of June 2018 rose to 5.77% compared to 4.43% in May  2018 and 3.62% in April 2018. The latest month WPI is also higher compared to just 0.90% in the month of June in previous year. 

With this, WPI has risen to a 15-month high, as the last time it recorded such trend was witnessed in March 2017. The current month high can be attributed to cost of food, manufactured products, and fuel. 

tradingeconomics.com
IIP

India's Industrial production (IIP) grew by 3.2% in May against 2.9% expansion in the same month last year, according to official data.

In terms of industries, 13 out of 23 industry groups in the manufacturing sector have shown positive growth during May 2018 as compared to the corresponding month of the previous year, the official data said. 

This is a drastic drop in May 2018, as IIP has been hovering 4% from March and now 3%. IIP in November 2017 stood at 5-year high to 8.5%, however, from there it came by 7% in February 2018 and later took a dive to 4.6% in March. May IIP is the lowest recorded in seven months. 

 

tradingeconomics.com
According to Care Ratings, here’s a list of seven factors that will also impact the decision of RBI. 

Crude Oil

The oil prices have declined from $75.3/bbl to $74.2/bbl since the last monetary policy (during 6th June’18- 27th July’18). 

Agreement between OPEC members to increase the oil production, concerns over global demand amidst worsening global trade relation and increased production from US has led to a decline in the oil prices. However, sustained supply disruptions in Libya, Venezuela and Iran capped the decline in oil prices.

MSP 

Increase in minimum support prices may not result in a substantial rise in inflation as most of its effect will depend on the dynamics of procurement and supply-side scenario. 

In the past, it has been noticed that due to excess supply of pulses, the prices have registered a decline despite a rise in MSPs.

Bank credit and deposit growth 

Bank deposits at Rs 114.8 lkh cr grew by 0.5% during 1st Apr- 6 th July’18 compared with a contraction of (-)1.5% growth in the corresponding period last year.  

While bank credit too witnessed a growth of 0.4% compared with a contraction of (-) 2.1% in the corresponding period last year.

Liquidity

Overall banking system liquidity (i.e. Total reverse repo – Total repo – MSF) continues to be pressured with liquidity deficit witnessing a sustained increase in the last three weeks. It currently is at Rs 38,799 crs as on 27th July’18. 

The RBI has undertaken OMO purchases three times amounting to Rs 20,300 crs since the last monetary in order to ease the liquidity pressures.

The Central Government has auctioned Cash Management Bills (CMBs) amounting to Rs 65,000 crs since the last monetary policy ( i.e. after 6th June’18), indicative of liquidity pressures. 

GSEC yield

10 years GSec yields have declined from 7.92% to 7.78% during 6th June’18- 27th July’18. The decline can be ascribed to time to time buying of government securities by the banks on improved liquidity conditions in the banking system and OMO purchases by the RBI. 

However, depreciating rupee, increase in MSP of kharif crops and bullish stance taken by the US Federal Reserve’s Chairman on US economic growth and policy rates limited the fall in the yields.

FPIs 

FPIs have been moving out of the country in the last four months and have been negative in both the equity and debt segments barring July where equities have witnessed foreign funds inflow to the tune of $16 mn. 

A weaker rupee and rising interest rates in the west makes India a less attractive market for FPIs. 

Exchange rate 

Rupee has depreciated against US dollar from Rs 66.9/$ to Rs 68.7/$ during 6th June’18- 27th June’18. Widening trade deficit in May’18, foreign fund outflows, worsening of trade relations, concerns over fiscal position of the government post MSP announcement led to weakening of the rupee. 

Increased likelihood of US rate hikes and winding down of ECB’s stimulus program may further lead to reallocation of funds and depreciation in the rupee. 

Further, HDFC Securities also highlight points that will be likely considered by RBI in making decisions. 

Trade war issue

Recent agreement between Europe and the US to move toward a “zero tariff” situation should also come as sign of relief. 

No doubt that the negotiation between the two parties have just started and it would take some time for final settlement but the agreement will prevent any further tariffs while the talks are under way and should be comforting for global markets, with some easing of the exchange rate risks for emerging markets.

Monsoon Update

Monsoon progress so far is 2.8% below the long term average, which means it is normal. Central and South India have received sufficient rainfall but East and North India have still not picked pace. 

However, true picture of the distribution and reservoir level will be available only by September, anecdotal evidences suggest higher water level in the tanks.

Fed too is likely to hold

HDFC believes the US Fed will likely hold its rates steady at the meeting that ends today. 

This gives the RBI the comfort to watch inflation, monsoon progress and observe the currency and crude dynamics before considering a hike again. But the Fed will meet again in September, where as the RBI will only re-assemble in October.