Key issues MPC is debating at 2-day money policy review
Amid adverse global developments, MPC may need to revamp policy rates and avoid status quo.
As the MPC goes into a huddle to review its policy, here is a list of issues that should dominate MPC discussions today and tomorrow.
Global trend - rising interest rates: US interest rates are on an upward rally since 2015 and the Fed has guided 1.5-1.75 per cent increase in rates in the coming year. Dalal Street will want to understand the monetary policy committee’s stance on interest rates amidst the global trend.
The US rate hike will mean huge outflow of bond money from India, as yields will increase in the US compared with that in India and it may trigger a selloff by investors.
If RBI keeps policy rate stable and the US Fed hikes rates at regular intervals, spread between the two rates will increase, which will discourage investments in developing economies.
The rupee will start to depreciate if RBI does not maintain interest rate parity in response to the US monetary policies. This could weaken the rupee, which would inflate the import bill amidst the rising crude oil prices.
Hence, it would be optimum for the MPC to keep rates in line with market expectations. Devaluation of the currency can prove good for industries such as pharma and IT, as majority of their operations and revenue depend on international markets.
Tight balance between growth and inflation
MPC always must indulge itself in a dilemma between growth and inflationary pressures. Private capex in India has not picked up currently, which is in nobody’s interest and, therefore, the MPC needs to look for ways to increase spending without disturbing the price equilibrium.
On the other hand, ever rising prices of commodities, including base metals and crude oil, are putting pressures on prices. The inflation rate has been projected at 4.3-4.7 per cent for the second half of FY18 and this rate is projected to increase to 5.3 per cent in 2019.
Hence, the MPC needs to be diligent while deciding on interest rates this time with international and domestic pressures surrounding India.
In spite of all the demands, there is consensus among economists and analysts that the central bank will maintain status quo on policy rate this time around.