RBI August monetary policy: A 25 basis point rate cut or higher?

Key Highlights: 

• RBI maintained status quo in June policy 
• Policy repo rate stands at 6.25%
• Reverse repo rate and MSF rate at 6% and 6.50% respectively

As the Reserve Bank of India (RBI) readies to announce its bi-monthly monetary policy later this week, analysts unanimously expect a rate cut but it is the quantum of a cut that is being debated. 

Naresh Takkar, Managing Director and Group CEO, ICRA, said, “With the CPI inflation easing below the 2% floor of the inflation target band in June 2017, a reasonably favorable progression of the monsoon and kharif sowing so far, and limited evidence of a knee-jerk rise in prices following the imposition of the goods and services tax (GST), there is a high likelihood that the MPC would vote to reduce the repo rate by 25 bps in their upcoming meeting.” 

Consumer Price Index (CPI) inflation in India came at 1.54% in June 2017 in comparison with 2.18% in May 2017 and below market expectations which was at around 1.7%.

source: tradingeconomics.com

Also, another inflation indicator Wholesale Price Index (WPI) came in at 0.9% in June 2017 compared to 2.17% rise in May 2017 and 3.85% in April 2017. This was below market expectation of 1.6% rise. 

source: tradingeconomics.com

Here's the list of opinion of the MPC members in the last five policy. 

From October 2016 – April 2017, the MPC member have had similar opinions, while it was in June policy - where  opinions have changed abruptly regarding inflation outlook. 

According to State Bank of India, "The use of words like unutilised capacity makes us more
confident of a 25 bp rate cut on 2 Aug. Additionally, there are certain developments which also increase the probability of rate cut by RBI in the coming policy."

For now, policy repo rate under the liquidity adjustment facility (LAF) stands at 6.25%, while reverse repo rate remains at 6% and marginal standing facility rate at 6.50%.

ALSO READ: 

• RBI August policy: A 25 basis points rate cut in the offing?
• Low inflation to encourage RBI to cut rates next week: Reuters poll 
• RBI Governor meets Jaitley before monetary policy review
• RBI keeps interest rates unchanged but injects money via SLR cut