RBI Monetary Policy Review: Key Parameters to be Considered Before Policy Announcement on Wednesday

It is the first time that the Monetary Policy Committee (MPC) meeting is held for three days citing "administrative exigencies".

Reserve Bank of India’s (RBI) second bi-monthly policy review meeting of 2018-19 is underway. The decision about the possible policy action will be announced on Wednesday. It is the first time that the Monetary Policy Committee (MPC) meeting is held for three days citing “administrative exigencies”. MPC otherwise generally meets for the period of two days only.

With the rise in fuel prices across the country, there are expectations that the regulator may change its stance from neutral to hawkish considering a possible rate hike in future. While there are multiple factors that govern the regulator’s decision, here is a lowdown on some of the key parameters of the economy that the banking regulator may consider before announcing its policy stance on Wednesday.

GDP

The Indian economy grew by 7.7 per cent, in January-March 2018, according to data from the Central Statistics Office. The numbers came on the back of turnaround in manufacturing and pick up in investments.

Ranen Banerjee, Partner and Leader – Public Finance and Economics, PwC India, said, “The high growth rate reported in the quarter is on expected lines for us as the high-frequency data on PMI and IIP as well as rural demand were all indicating a revival. We should, however, be wary of the headwinds the economy faces in the coming quarters from higher crude prices feeding into inflation and rising inflation expectations. We hope the Monetary Policy Committee would not press the panic button that could create further friction on growth rate and would continue to hold on to the interest rates.”

During the previous quarters the gross domestic product (GDP) grew by 5.6 per cent , 6.3 per cent and 7 per cent respectively, in Q1, Q2 and Q3 of 2017-18. For the full Financial Year 2017-18, gross domestic product (GPD) has grown by 6.7 per cent.

Rising Fuel Prices

Rising fuel prices have been a cause of concern as it has a direct impact on inflation. With the increase in the cost of transportation, prices of many white and fast moving consumer goods have already been revised upwards

Despite constant criticism from the opposition and public, the immediate relief in the shape of reduced taxes by the government, however, does not seem to be on cards. Instead, Nitin Gadkari, Union Minister for Road Transport and Highways, said the government is making efforts to find long-term solutions to deal with the problem of the fuel price hike. He said, while addressing a press conference, “The government is making efforts to find long-term solutions to tackle the fuel price hike issue.”

He added that India should move to “alternative” fuels such as ethanol, methanol, bio-diesel, bio-CNG and electric to find a permanent solution of rising prices of petrol and diesel. “We have already stopped the subsidy on petrol and diesel, and we are giving LPG connections to 8 crore people. We could give the LPG connections to so many people because we stopped the subsidy on petrol and diesel,” Gadkari said.

Having said that, inflation might go up with an increase in fuel prices. RBI will definitely consider the inflation aspect while deciding on the policy action.

Manufacturing and Inflation Numbers

New work orders rose at a weaker pace in May affecting India’s manufacturing sector. Weak manufacturing along with rising inflationary pressures might prompt the Reserve Bank to hike interest rates.

The Nikkei India Manufacturing Purchasing Managers Index (PMI) fell from 51.6 in April to 51.2 in May. “The latest PMI survey signalled a further, albeit slower, improvement in the health of the manufacturing sector in May. This was reflective of weaker expansions in output, employment and new business,” said Aashna Dodhia, Economist at IHS Markit and author of the report.

This is the tenth consecutive month that the manufacturing PMI remained above the 50-point mark. In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.

Revealing inflation numbers the labour ministry said in a statement, “The year-on-year inflation based on CPI-IW (Consumer Price Index-Industrial Workers) stood at 3.97 per cent for April, 2018 as compared to 4.36 percent for the previous month (March 2018) and 2.21 per cent during the corresponding month (April 2017) of the previous year.”

With inputs from PTI