Interest rates to rise or fall? Here is what RBI may well do

RBI cannot ignore the need for some stability in liquidity, especially with only 20% of the budgeted government borrowing taking place. Image source: Reuters

Softening of inflation expected in July going up to November, due to the base effect and lower oil prices, may allow the Reserve Bank of India’s (RBI) monetary policy committee (MPC) to hold rates, while it awaits more data on the impact of minimum support price for farmers, according to economists.

The recent agreement between Europe and the US to move toward a zero tariff situation will also be a relief on the trade war front.

The MPC meeting will begin on July 31 and the decision will be unveiled on August 1.

“It’s a close call and a tough balancing act, but we expect RBI to tilt in favour of a ‘hold’ when it meets next week for the monetary policy review,” Abheek Barua, chief economist at HDFC Bank, said.

Stabilisation in the rupee in the recent weeks and moderation in oil prices could also be pointed out by the RBI as somewhat comforting.

Saugata Bhattacharya, chief economist at Axis Bank said, “Chances are that they may hold for now. Oil prices have moderated and inflation is expected to stay low at least until November due to the base effect, so expect a status quo.”

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However, the central bank may have to take care of the liquidity position. But with the demand for credit rising from the second quarter, RBI cannot ignore the need for some stability in liquidity, especially with only 20% of the budgeted government borrowing taking place.

Source: DNA

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