The Reserve Bank of India (RBI) is likely to keep the repo rate unchanged at 6.25 per cent during its bimonthly monetary policy review on Wednesday (June 7). However, the sluggishness in the fourth quarter GDP at 6.1 per cent once again brings back the growth concerns for the Monetary Policy Committee. While the fall in the GDP is directly linked to demonetisation, the government would certainly like further easing of rates to spur growth. That the inflation numbers are coming down is another plus, but new risks are emerging on the horizon, which could hinder India from achieving the inflation target. Here are five reasons that call for a cautious approach right now.
Tension in the Middle East: With Saudi Arabia and its allies having severed diplomatic and economic ties with Qatar, alleging that the latter is supporting terrorism, the rising tension in the Middle East has the potential to impact crude oil prices. Although Qatar is not a big player in oil, the volatile situation in the region does not bode well for oil-importing countries like India.
GST and the uncertainty: The market fears that the Goods and Services Tax (GST) will push up the prices in the short term. With the government implementing the GST by July, the RBI would prefer to wait and watch. In the last review, RBI Governor Urjit Patel actually cited the GST as one of the risks that could alter the inflation outcome in 2017/18.
Fed rate hike: Once again, there are speculations over Fed rate hike in June. The US Federal Reserve has been doing it since December 2016 with short-term interest rates moving up from 0.75 to 1 per cent. After a long period of near-zero interest rates, the Fed is back with a normal policy. It had earlier resorted to quantitative easing (QE) to boost demand across the economy as near-zero rates had no positive impact. A Fed rate hike is not good news for emerging markets like India as it has the potential to impact dollar inflows into emerging markets. Many think it is also the right time for the US funds in emerging markets to book profits in the stock market and head home. This will have a negative impact on countries like India if there is a huge dollar outflow.
CPI inflation: The CPI (consumer price index) inflation has come down from 3.89 per cent in March to 2.99 per cent in April this year. The RBI had earlier projected the inflation to average 4.5 per cent in the first half ( April-Sept) and 5 per cent in the second half (Oct-March) in the current financial year. The central bank has factored in variables such as the 7th Pay Commission, GST and remonetisation, among other factors. However, the recent farmers' agitation is not good news as it can affect food prices.
Transmission of rates: The banks are always reluctant to pass on the full benefit of repo rate cut to borrowers. In fact, the deterioration in asset quality, and the consequent provisioning and falling of profitability have already impacted the banks' ability to transmit the rates in full. This helps banks to earn more from existing customers. However, the RBI believes there is still room for the banks to cut rates.