The Reserve Bank’s Monetary Policy Committee (MPC) will be holding its policy review meeting on 4th & 5th April, 2018 and will be sharing the outcome of the review on 5th April 2018. The MPC will be focusing on assessment of the current global & economic conditions and consequently comment on the medium term outlook on the critical indicators. The indicators to be focused will be consumer confidence, households’ inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters.
The MPC would be considering the recent interest rates hike by the FEDs. The Federal Reserve decided to turn hawkish with a rate hike (sixth since the financial crisis) and changing the interest rates range to 1.5-1.75%. To top it up, Jerome Powell (the new chairman of the Fed) has indicated that the Fed will continue with the hawkish stance and might decide to hike rates twice in the remainder of the year 2018.
Currently, following are the key rates:
- Repo Rate – 6%
- MSF Rate – 6.25%
- LAF Rate – 5.75%
Link to the previous monetary policy prediction: What we predicted last time!
Global & Domestic Conditions Assessment:
- In the advanced economies, the gradually falling unemployment, low interest rates, significant consumption and investment thus leading to recovery in the overall growth
- The emerging economies continue to show positive growth with vulnerabilities related to political uncertainty and lack of consumer confidence.
- Global trade continued to expand, underpinned by strong investment and robust manufacturing activity
- Crude oil prices have started to head northwards in the recent past and are expected to continue amidst weak supply
- On the domestic front:
- GVA first advance estimates has been revised negatively to 6.1% from 7.1% amidst slowdown in agriculture and manufacturing
- Manufacturing PMI contracted whereas the services PMI has expanded sequentially over the past few months
- Retail (CPI) inflation decreased from 5.07% to 4.44% in February. However, the average inflation continues to hover above the medium term comfortable levels of 4%
- Core inflation (non food & fuel) has continued to increase due to increasing household inflation coupled with the HRA allowance of the 7th pay commission
- Households’ inflation expectations, measured by the Reserve Bank’s survey of households, remained elevated for both three-month ahead and one-year ahead horizons
Assessment & Outlook
- The GVA projection have stood at the lower side of 6.6%. Following key factors will impact the GVA:
- Stabilizing of the GST regime
- Increased investment activity
- Increased capacity utilization (currently at 70%)
- Resolution of the large credit defaults
- Stable crude oil prices (the trend suggests that the crude oil prices are expected to increase further)
- The average inflation continues to be above the 4% levels. The inflation is expected to increase further in the year and will be shaped by the following aspects:
- Further firming up of the international crude oil prices
- Further increase in the input costs
- Normal monsoons (above 88%)
- The new process to calculate the minimum support prices might have an effect on the overall inflation
I predict, that the RBI may decide to increase the repo rate by 25 bps to 6.25% in order to contain the increased expected inflation, significant increase in inputs costs and the Fed hawkish stance. The move is expected to help the banking sector to revive profit margins as the banks will get the opportunity to increase the lending rates accordingly.
The RBI might also change their neutral stance to being ‘HAWKISH’ for the year 2018-2019. CRR & SLR will be untouched due to the ample amount of liquidity.
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