RBI monetary policy: Rates to be hiked, or cut? Here is what will weigh on MPC members mind

As six members of Monetary Policy Committee (MPC) of RBI begin their three-day meeting here today to decide the key policy rate, rising inflation and high crude oil prices are likely to dominate their minds. The seven-quarter high growth rate of 7.7 per cent in January-March 2018 and expectations of a normal monsoon has, however, reduced the clamour for a cut in the benchmark lending rate (repo) by the Reserve Bank of India (RBI).

According to Reuters report, the anticipated increase could put a dent in growth, which has recovered after blows from the November 2016 demonetisation and the bumpy July 2017 launch of a national goods and services tax. But the key concern of the central bank, which has long kept the repo rate at 6 percent, is the inflation rate, which is widely expected to climb further. 
 
A Reuters poll before the January-March growth data showed that 40 percent of nearly 60 respondents saw a rate hike on Wednesday, while nearly 70 percent of 44 projected that in August - a sharp contrast to an April survey seeing an increase only in 2019`s second half. But the robust growth data caused some to see a rate increase sooner rather than later for the repo rate, at its lowest since November 2010. 

"While we had pencilled in the first hike for August, we now think there is a good chance the monetary policy committee will pull the trigger in June," A Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai told Reuters.

Prasanna reportedly expects the RBI to revise its consumer inflation projection upwards by 0.3 to 0.4 percentage points for March 2019 as the "risks to inflation are overwhelmingly ranged on the upside."
India`s annual consumer inflation was 4.58 percent in April, the sixth straight month when it topped the RBI`s medium-term 4 percent target.

If India`s monetary policy committee does not raise rates this week, it would instead shift its stance to "tight" from "neutral", many analysts reportedly said. 

"Markets are clearly pricing in 50 basis points rate hike in the next six months primarily due to concerns over oil prices rising further and rupee weakening more," Anindya Dasgupta, managing director and head of trading at Barclays in Mumbai, told Reuters, adding If the repo rate is not hiked until August "it will lower the credibility of the central bank given that many other Asian central banks have already acted." 

It may be noted that Retail inflation (CPI) has remained above 4 per cent since November 2017. The government has reportedly mandated the RBI to restrict the retail inflation at 4 per cent (with a margin of +/- 2 per cent), while supporting growth.

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The second bi-monthly monetary policy resolution for the current fiscal will be announced in the afternoon of June 6.