BackMonetary policy: The backdrop
Most analysts expect RBI to keep its policy rates unchanged at the third bimonthly monetary policy review of 2015-16 on Tuesday
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Mumbai: Most analysts expect the Reserve Bank of India (RBI) to keep its policy rates unchanged at the third bimonthly monetary policy review of 2015-16 on Tuesday.
At the last review in June, RBI cut rates by 25 basis points, or 0.25 percentage point, and indicated that room for further rate cuts was limited due to risks to inflation emerging from factors such as a deficient monsoon.
The central bank also revised its year-end monsoon forecast upwards. The bond markets reacted negatively, and pushed up yields. Since then, however, there have been some developments that may give the central bank more flexibility.
Monsoon rainfall has picked up and global commodity prices have dropped. In particular, oil prices, which had started rising, have fallen again.
The central bank may take note of these factors and indicate that some room for monetary easing may open up if inflation and upside risks to inflation remain in check.
RBI will also take into account the fact growth indicators have remained subdued. It may also point out to banks that they are still to transmit the full impact of its rate cuts. While RBI has cut rates by 75 basis points this year, most banks have only cut base lending rates by about 25 basis points or so.
Inflation
Inflation is moderating, and is well within RBI’s comfort zone.
HSBC PMI
Some contraction can be seen in the services Purchasing Managers’ Index (PMI).
Rupee
The rupee has seen some volatility recently in the wake of US Federal Reserve (Fed) rate hike signals.
Foreign institutional investors
Foreign investors are reacting to the Fed policy tone, and may dilute their holdings significantly when US rates finally rise.
Index of industrial production (IIP)
Inflation is moderating, and is well within RBI’s comfort zone. Some contraction can be seen in the services Purchasing Managers’ Index (PMI). Industrial production dipped in May, indicating slowing growth.
GDP growth
The new series of GDP numbers shows healthy economic growth, even as analysts differ on the methodology of arriving at the numbers.
10-year bond yield
Despite a 75 basis point policy rate cut by the central bank since January, bond yields have not moved much.
Interest rates
Since January, RBI has reduced its policy rate by 75 basis points.
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