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4 Reasons why the RBI may not change policy outlook
There has been a great deal of speculation regarding the policy review meeting that is to be held by the Reserve Bank of India (RBI) on 6 June 2017. With the recent plunge in inflation, all eyes are focused on the view that the RBI Monetary Policy Committee takes on borrowing rates.
Here’s what you should know:
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Inflation
During the last policy review meeting in April this year, the RBI maintained the key policy rate at 6.25% for the third time in a row. It had shifted its policy stance from “accommodative” to “neutral” earlier. The main reason for this move was the risk of inflation, according to the central bank. However, the average Consumer Price Index (CPI) inflation was as low as 3% for the month of April compared to the RBI’s medium term target of 4%. This was driven largely by deflation in vegetables and pulses. In addition, the trend for core inflation has been downward for the past six months indicating a slack in growth.
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Decreasing global risks
The major global inflation risks that were mentioned by the RBI in April are fading. For example, the crude oil prices have stabilized and the rupee has strengthened. It is unlikely that the rupee will depreciate sharply enough to impact inflation over the coming year. In addition, the decrease in global volatility spells out good news for the Indian markets.
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Domestic risks
Though moving ahead has been good until now, there are a few domestic risks to inflation over the next year. For instance, the 7th Central Pay Commission (7CPC) related announcement is still pending. A 60 bps increase is expected after its implementation in July as per a report by Kotak Securities.
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Policy outlook: Monsoon & GST
With the ebbing risks of inflation, a change in policy is largely expected in the upcoming meeting. However, the Monetary Policy Committee (MPC) may wait and observe the impact of the monsoon and the Goods and Services Tax (GST) implementation before changing its stance. A poor monsoon could largely impact the prices of fruits, vegetables and pulses. At the moment, the Indian Meteorological Department (IMD) has forecasted a normal monsoon. As far as GST is concerned, it could take some time for the process to be on track. There could be a few pricing distortions during the transition period as firms gain clarity over the process.
Despite the fact that inflation has come in below the expected estimates, the RBI may remain cautious on key rates during the upcoming policy review. It is expected that the central bank might maintain its neutral stance on the monetary policy.
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22.4 million
The production of pulses during the year 2016-17 is estimated to be around 22.4 million tonne, according to some press reports. This is a 37% rise from the previous year. The increase in production of pulses and vegetables was a key driver in the recent undershooting on inflation. However, the RBI might remain cautious as this impact could be transitory.
