RBI Likely To Maintain Status Quo As Inflation Risks Weigh

The Reserve Bank of India is likely to keep interest rates unchanged in its first bi-monthly monetary policy review for the financial year 2018-19 to be unveiled this week as hardening global crude oil prices continue to pose a risk to domestic inflation.

This would also be the first monetary policy announcement after the Budget, which has slightly deviated from the fiscal consolidation roadmap.

The six-member monetary policy committee, headed by RBI Governor Urjit Patel, is to meet on April 4 and 5.

Pressure has been mounting on the RBI to cut interest rates in the wake of declining retail inflation and the need to fuel growth momentum. However, the central bank has a tightrope walk ahead as globally interest rates are inching upwards.

Last month, the U.S. Federal Reserve raised interest rates by a quarter of a percentage point and signalled that it is on track to raise rates twice more in 2018. Besides, the RBI has to take into consideration the rise in crude oil prices which temporarily touched $70 per barrel.

“We expect the MPC to keep policy rates on hold and maintain its neutral stance,” analysts at American brokerage Morgan Stanley said in a note.

Bank of America Merill Lynch also echoed the view, but added that it expects a rate cut in the August review if the monsoons are favourable.

After surging to a concerning 5.2 percent in December, the headline inflation cooled off to 5.07 percent in January and further to 4.4 percent in February.

Even industry chambers are of the view that the central bank would opt for status quo as the government's budget announcement to provide farmers 1.5-times of minimum support price for their produce may jack up inflation. "This would leave very little leeway for the RBI to cut rates in this monetary policy and hence we expect the RBI to keep the key interest rates unchanged," Assocham said in a statement.

Currently, repo rate – the short term lending rate at which RBI lends to banks – stands at 6 percent. Consequently, the reverse repo rate is 5.75 percent and the marginal standing facility rate and the bank rate stand at 6.25 percent.

According to Kotak Mahindra Bank, the RBI is expected to be on an extended pause as inflation is likely to remain close to 4.5 percent during 2018-19.