Six-member Monetary Policy Committee (MPC)

Six-member Monetary Policy Committee (MPC)


When the six-member Monetary Policy Committee (MPC) of the Reserve Bank meets on February 7 and 8, their decision on a possible rate cut will be influenced by the budget outcomes more so with due anxiety placed on the impact of demonetisation on growth and a gentle inflation outlook despite rising fuel prices.

Many of the analysts and bankers still hope a 25 basis points reduction in the key policy rate — the repo rate — to 6 per cent on February 8 when Governor Urjit Patel will unveil his third policy review.  A report further adds that since the last RBI policy, CPI inflation has surprised to the downside both in November and December, which has improved the chances of meeting the 5 per cent March 2017 CPI target appreciably. Come Down?

A senior official adds that apart from the policy details, the markets are also keen to hear about the demonetisation impact and numbers, especially how much money has come in and gone out.  It remains to be seen whether there will be consensus in MPC this time. The RBI is yet to provide details of the total amount deposited at the end of the 50-day demonetisation drive.

Experts feel that RBI should cut the Basic points 0.25 per cent, now, rather than in April.  However, the extent of further cuts in the repo rate will remain restricted and be conditional on uncertainties in the global commodity cycle, Brexit and Trump related volatility in the global financial markets and hence, likely depreciation pressures on the rupee.

Also, a section of bankers feel that the RBI may not want to cut the policy rate too aggressively in the period ahead, but still want to deliver lower market rates by making liquidity more abundant. Possibly, here RBI will allow liquidity to move into surplus territory in the money market, which will push the overnight call rate to the lower end of the LAF corridor (reverse repo rate), leading to an effective easing of rates.

The RBI Governor adds that it is prudent to wait and watch how these factors play out.  Accordingly, the policy repo rate has been kept on hold in this review, while retaining an accommodative policy stance.  The RBI has made it clear that it will strive for achieving consumer price index inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth.

However, analysts had said India’s overall monetary conditions — which reflect the combined impact of monetary stance based on changes in real interest rate and real effective exchange rate — remain in a restrictive zone, even after 175 bps rate cuts from the RBI, mainly due to a persistent appreciation of rupee in real terms.

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