RBI Monetary Policy: Dilemma over status quo, rate hike on as MPC confabulates

Even as the Reserve Bank of India's Monetary Policy Committee (MPC) is, for the first time, holding a 3-day meeting - from June 4-6 - since it was constituted in 2016, to decide whether to hike, cut or retain the status quo on key interest rates, analysts are divided on what is in store tomorrow. Most of them, through various polls, are expecting a status quo, while some believe an actual rate hike is coming.
 
The RBI had kept the repo rate unchanged at 6% in its last policy meet, but hinted that it may change its stance based on inflationary risks. RBI executive director Michael Patra was the only member of the six-member panel who voted for a rate hike of 25 bps.
 
The central bank, which had projected a GDP growth of 7.4% for FY19 and inflation at 4.7-5.1% for the first half of this fiscal, will announce the outcome of the MPC meeting on June 6. 
 
According reports, the six-member committee has a tough task this week as it has to cut through the reported noise it has created in the past two policy sittings through the resolution statement, and the minutes that followed.
 
According to a a Reuters poll, an increasing number of economists expect the RBI to raise interest rates on Wednesday, but most still think the central bank will stay on hold and use this week`s meeting to prepare for an August hike.
 
In a snap poll of 56 economists taken after gross domestic product (GDP) data was released, 26 respondents, or about 46 percent, see the RBI taking the repo rate higher at the June 6 meeting. The GDP data showed Asia`s third-largest economy grew at its fastest pace in nearly two years in the January-March period.
 
That compares with 21 of 57 economists, or about 40 percent of them, in a Reuters poll taken before the GDP data was published.
 
In the latest Reuters poll, most economists expect the repo rate to remain at 6.00 percent on Wednesday, a majority forecast the RBI to raise it by 25 basis points to 6.25 percent in August. The polls reported said that the RBI may use the June meeting to shift its policy communication to an explicit tightening bias away from the neutral bias it has held since February last year.
 
"The consensus is expecting the RBI to keep rates on hold at the upcoming meeting. But a surge in core inflation, looser fiscal policy and rising oil prices are a concern for the MPC (Monetary Policy Committee)," Shilan Shah, senior India economist at Capital Economics, who predicts a June hike, told Reuters.
 
Meanwhile, Indian shares edged down on Tuesday and were headed for a third straight session of fall amid caution ahead of the RBI's decision tomorrow. Sentiment was also hurt after a survey showed services activity in May shrank for the first time in three months as new orders stagnated.
 
The Nikkei/IHS Markit Services Purchasing Managers` Index fell to 49.6 in May, sinking below the 50-mark that separates growth from contraction.
 
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"Services PMI data came in below 50, which means export-led industries will show some decelerating growth," Anita Gandhi, whole time director at Arihant Capital Markets Ltd, told Reuters.