RBI to maintain status quo in August policy meet: Experts

The Reserve Bank is likely to maintain status quo on the key interest rate on Wednesday notwithstanding elevated oil prices and government's announcement to steeply hike minimum support price for kharif crops, opined experts. The central bank had increased the benchmark short term lending rate(repo rate) by 0.25 per cent to 6.25 per cent in its last monetary policy review in June on inflationary concerns.

Reserve Bank Governor Urjit Patel-headed Monetary Policy Committee (MPC) will begin its three-day deliberations from Monday in Mumbai to decide on the interest rate. The decision of the second bi-monthly monetary policy review of 2018-19 will be made public in the afternoon of August 1.
The retail inflation, which is factored in by the MPC, spiked to a five-month high of 5 per cent in June on costlier fuel. 

The government has mandated the Reserve Bank to keep inflation at 4 per cent (+/- 2 per cent). Crude oil prices have come off three year high, but continue to be volatile threatening inflation and current account deficit. India's largest bank SBI feels that RBI may not go for another round of rate hike at this juncture.  "We believe August rate decision is a close call, though we believe status quo rather than a hike looks the best option," SBI said in a research report. 

The only reason for a rate hike by RBI at this juncture might be to "satiate the self fulfilling prophecy" of market expectations of a rate hike to stem the rupee depreciation (though rupee depreciated by 3 per cent post June), it added. In SBI's view, inflation risks are still evenly balanced.  While the MSP hike could statistically push up CPI by 73 basis points, such inflation is unlikely to materialise as it is purely subject to procurement by the Central government/State Government. 

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Earlier this month, the Union Cabinet steeply hiked the minimum support price for kharif crops, including Rs 200 per quintal for paddy, as the government looked to fulfil its poll promise to give farmers 50 per cent more rate than their cost of production.  Edelweiss Securities in a research note said: "In the upcoming policy review, we expect MPC to maintain its neutral stance while keeping the rates unchanged".

Global financial services major DBS in a research report, however said RBI is expected to go for further rate hikes this fiscal, with the next increase in the August meet. According to DBS, upside risks to inflation and a need to maintain financial markets' stability will keep monetary policy on a tightening bias. "We expect 50 bps more hikes in 2018-19, with the next likely in August," Radhika Rao, an economist with DBS said.

Private sector lender HDFC Bank believes that the decision on rate hike is a "close call" for RBI, but its rate-setting panel will go for a status quo on key policy rates in the upcoming policy review meet. "It's a close call and a tough balancing act, but we expect RBI to tilt in favour of a 'hold'," its house economists said in a note. On the MSP hike, it said there is some uncertainty but it is prudent for RBI to wait and watch as rainfall distribution, procurement for items other than rice and wheat will decide the way forward.