What to Expect From RBI's All Important Monetary Policy Meeting

New Delhi: To cut or not to cut? That is the question the Reserve Bank of India will be grappling with today.

The central bank’s monetary policy committee, comprising Governor Urjit Patel and five other members will take a call on Wednesday on whether the key interest rate of the Indian economy, called the repurchase rate, ought to be cut or not. But, most financial analysts say it will be a tough call.

The repurchase rate (repo rate) is the interest rate at which the RBI lends money to commercial banks, which in turn extends it to customers for home loans and car loans and to companies for infrastructure development. A cut in the repo rate makes retail loans cheaper, thus boosting the economy, whereas an increase reins in economic activity and controls inflation. The repurchase rate is currently 6.25%.

A Bloomberg poll of economists found that most (30 of 33) expected the RBI to cut the repo rate to 6% while 28 of 46 participants in a Reuters poll expected a cut.

Pronab Sen, the former chief statistician of India, told News18 that a rate cut by the RBI would send a signal that monetary policy is supporting economic growth. “As cash flooded into the banking system after demonetization borrowing costs went down, but now, as remonetization picks up and money starts getting withdrawn interest rates will start inching back up,” he said. Sen said that the RBI should cut the repo rate to 6%.

The economy needs an interest rate boost to recover from the disruption caused by Demonetization. Personal consumption spending has declined after 86% of legal tender was declared invalid on November 8. The real estate sector also suffered a temporary decline. All data points suggest that housing and transportation, exactly the things that will receive a boost with a rate cut, have been temporarily disrupted.

Moreover, the Union Budget presented by Finance Minister Arun Jaitley last week adopted a fiscally prudent path by sticking to a 3.2% fiscal deficit target and announcing a lower government borrowing programme. Both these steps are expected to rein in inflation, giving the RBI increased scope to cut interest rates.

All these things work in favour of reduced interest rates, especially since growth projections for the Indian economy have been lowered following demonetization. The International Monetary Fund’s forecast of 6.6% is even lower than the RBI's 7.1% estimate.

However, some analysts don’t expect a rate cut, citing the possibility of rising inflation due to increased oil prices and volatility in the global economy. The policy announcement will reveal whether the RBI opts for supporting the economy or towards caution.