MUMBAI: As the Reserve Bank of India’s Monetary Policy Committee (MPC) began its closed-door, two-day review here on Tuesday, market opinion is divided -- unlike the previous MPC meetings -- whether the central bank will cut or hold policy rates.
Economists say the MPC has its task cut out: cut or hold rates or soften its tone to accommodative from its current neutral stance. Year 2017, so far, saw only one rate reduction of 25 basis points.
While some expect the central bank to cut rates to boost growth, others believe RBI will keep the benchmark repo rate unchanged at six per cent, besides opting for a prolonged pause in 2018.
“With global crude oil prices hovering at $63 a barrel and the central government likely to miss its FY18 fiscal deficit target of 3.2 per cent by 30 bps, as per our estimate, we believe a rate cut in FY18 now looks difficult,” said Tanvee Gupta Jain, economist, UBS Securities India Pvt Ltd.
With India still in the middle of a recovery cycle, with private investment remaining weak and subdued credit growth reflecting suggest economic activity, a rate hike would detail the growth recovery, she added.
Those favouring and expecting a cut feel there are enough reasons supporting the move. For one, GDP growth grew 6.3 per cent in the second quarter of FY18, following five quarters of successive slowdown. Several economic indicators hint a cyclical recovery is underway. Though October data shows a slowdown in activity, it is considered as a blip and growth momentum is expected to accelerate in the second half of the fiscal.
Inflation seemed to have turned a corner, but the October number printed at 3.58 per cent, not far from the central bank’s target. Economists feel inflation will likely remain far above 4 per cent through 2018 on the back of rising food and fuel prices and reduced slack.
“We expect monetary policy to be tightened only gradually to ensure that monetary conditions remain accommodative, spurring credit growth and support in economic activity,” said Priyanka Kishore, lead Asia economist at Oxford Economics.