Though the decision on either hiking the policy repo rate or maintaining status quo will be a close call at the upcoming bi-monthly policy review, the majority of the Monetary Policy Committee (MPC) members may prefer the latter, according to market experts.

Even as they take into account softening crude oil prices and a stabilising rupee, experts feel the MPC members are likely to look through the recent spike in retail inflation, await more clarity on the impact of the revision in the minimum support price (MSP) formula for kharif crops and monsoon rain, and favour a ‘wait-and-watch’ approach. The central bank had raised the repo rate (the interest rate at which it provides liquidity to banks to overcome short-term liquidity mismatches) by 25 basis points from 6 per cent to 6.25 per cent even as it persisted with its neutral policy stance in the second bi-monthly monetary policy review on June 6. The third bi-monthly monetary policy review is scheduled for August 1.

According to State Bank of India’s research report, Ecowrap, “The August rate decision is a close call, though we believe status quo, rather than a hike, looks the best option.”

The report elaborated that the only reason for a rate hike by the RBI at this juncture might be to satiate the self-fulfilling prophecy of market expectations of a rate hike to stem the rupee depreciation.

“Inflation risks are still evenly balanced. While the MSP hike could statistically push up CPI (consumer price index based inflation) by 73 basis points, such inflation is unlikely to materialise as it is purely subject to procurement by the central/ state governments...The impact of MSP could also be negated by declining oil prices,” the report said. One basis point equals one-hundredth of a percentage point.

Retail inflation rose to a five-month high of 5 per cent in June against May’s reading of 4.87 per cent. The spike in inflation was mainly due to fuel and light, miscellaneous items, and clothing and footwear.

“I don’t want to speculate on what will happen on August 1. Maybe, they may hold or increase the rate. However, over a one year time-frame, I think, up to 75 basis points (including the June hike) increase in the repo rate is possible..The difference (of over 150 basis points) between the benchmark 10-year government security and the repo rate is very high. I feel this gap will narrow down to below 100 basis points,” said Union Bank of India MD & CEO Rajkiran Rai G.

Underscoring that it is a close call and a tough balancing act, HDFC Bank, in its research report, said it expects the RBI to tilt in favour of a ‘hold’ in August. “The inflationary risks are still there but the rise in food prices (in June and July) has been lower than the historical trend and this sort of sub-par food inflation could be underlined as an offsetting factor against the MSP risk and elevated core inflation.

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

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