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Last updated: 02 Apr, 2018  

RBI.Thmb.jpg RBI policy review

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Bikky Khosla | 02 Apr, 2018

The Reserve Bank of India will review its monetary policy on 4-5 April. In its last review in February, which took place against the backdrop of fiscal slippages, pressure on inflation and rising oil prices, the policy rate was left unchanged at 6 percent. But the tone was cautious. The decision to not change the repo rate was taken with a 5-1 vote, with one member calling for a quarter percentage rate hike. This time again, it is widely viewed, the central bank may maintain status quo.

It is estimated that inflation may average around 4.6 percent in January-March quarter, lower than the RBI's projection, but it is unlikely that the central bank will not take into account the inflationary risks in the form of higher oil prices, increase in Minimum Support Price and Pay Commission payouts. On the other hand, a broad based industrial recovery was witnessed in the past two months, indicating a strong cyclical recovery. It seems the central bank will follow a 'wait and watch' policy as of now amid these conflicting trends.

Such a balanced approach is expected by the Indian industry as well. It is pointed out that as inflation has started coming down a status quo in rates would address the upside risks to inflation while addressing the aspirations of growth. Some experts are also of the view that the central bank should maintain sufficient liquidity in the bond market in order to keep interest rates moderate. Also, demands are raised that the RBI's banning of letters of undertaking for trade finance should be lifted, particularly for SMEs.

Meanwhile, the trade war between the US and China has continued to escalate, with the latter slapping a tariff as high as 25 percent on 128 American products. The move came after Trump administration's imposition of trade charges of up to $60 billion on Chinese imports despite Beijing's stern warning. This is not a good sign for global trade as well as India's exports. Additionally, if the conflict continues, the Rupee could be adversely affected and the RBI may in such a situation go for rate hikes to protect the currency.

I invite your opinions.

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