Money & Banking

RBI may keep rate on hold at next month’s policy review

Our Bureau Mumbai | Updated on January 15, 2018

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The 25-basis-point hike in the US Federal funds target rate by the US Federal Reserve and the higher domestic retail inflation reading may prompt the Reserve Bank of India to keep its policy rate on hold in its first bi-monthly monetary policy review of the new financial year, scheduled for early next month.

Though the rupee has strengthened post Uttar Pradesh polls due to copious inflows into the equity markets, experts say that it will feel the heat of more US Fed rate hikes this year. Hence, the RBI may continue to be in pause mode on interest rates, possibly preparing the economy for a reversal in the interest rate trajectory.

Retail inflation

Moreover, the RBI will be watchful of the movements in retail inflation, which rose to a four-month high of 3.65 per cent in February after hitting a low of 3.17 per cent in January.

While changing its monetary policy stance from ‘accommodative’ to ‘neutral’ in its last bi-monthly monetary policy statement, the RBI emphasised that “the appetite for risk has returned in advanced economies, buoying equity markets and hardening bond yields as a response to the growing likelihood of further increases in the Federal funds rate during the year.

“Coupled with expectations of fiscal expansion in the US, this has propelled the US dollar to a multi-year high.”

In the last policy review, the RBI kept its policy rate (the interest rate at which it provides funds to banks to help them tide over temporary liquidity mismatches) unchanged at 6.25 per cent.

Underscoring that it remains committed to bringing headline inflation closer to 4 per cent on a durable basis and in a calibrated manner, the policy-setting six-member committee said: “This requires further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky.”

Shift in rate environment

Fitch Ratings said it believes the recent US rate hikes could mark the beginning of a significant shift in the global interest rate environment, with benchmark US policy rates settling higher over the long term than current market expectations.

David Rasquinha, Managing Director (Additional Charge), Export-Import Bank of India, said: “The rupee has, in fact, strengthened significantly. So, there is really no immediate worry for us that the US Fed rate hike is going to weaken the rupee. The opposite has happened. So, I don’t see the RBI reacting on this point just yet.”

Published on March 16, 2017

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