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On the 4th of October, the RBI Governor will present the fourth bi-monthly Monetary Policy Statement for 2018-19. Itcomes against the back drop of a rather interesting economic landscape

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On the 4th of October, the RBI Governor will present the fourth bi-monthly Monetary Policy Statement for 2018-19. Itcomes against the back drop of a rather interesting economic landscape.

 

·       Interest rates– For the first time in over four and a half years, the RBI raised the repo rate in two consecutive bi-monthly Monetary Policy meetings (June and August 2018), by 25 basis points each time, bringing it to 6.5%. Meanwhile, short term rates (as captured by the 91 day T-bill) have been rising since April 2018 while long term rates (as reflected by 10 year bond yields) have been on a rising trend for over a year.

 

·       Text Box:  GDP – The economy grew 8.2%Y-o-Y in the quarter ended June, 2018, on the back of a strong performance in core sectors, including manufacturing, electricity, gas, water supply & other utility services and construction. This was a considerable mark-up over the robust 7.7%clocked in the last quarter of FY2018 and beat market expectations of 7.6% by a wide margin. In fact, it was the strongest growth rate since the first quarter of 2016.

 

·       Inflation - According to the Central Statistics Office (CSO),Consumer Price Inflation rose 4.17%Y-o-Y in July, declining from the five-month high of 4.9% in June. A combination of a good monsoon and lower prices of pulses, vegetables and sugar kept the CPI in check, despite the upward pressure from rising crude and petroleum prices.While the July figure was within the Monetary Policy Committee’s(MPC)CPI-based retail inflation target of 4.2% for July-September but higher than the medium term target of 4%.

 

·       Rupee – Although the Rupee was hammered down against the Dollar by close to 14% YTD, the real effective depreciation of the Indian rupee this year as compared to its December 2017 level is around 6-7%, according to the IMF, due to the fact that the currencies of many of India’s trading partners, including those in the emerging markets, too have depreciated against the dollar.While the RBI has adequate reserves to defend the Rupee for now, it seems to be allowing it to fall adequately, to accommodate rising crude prices and other fundamental downward pressures.

 

·       Global scenario – President Trump’s mission to Make America Great Again seems to be impacting the rest of the globe rather adversely. With the rise in the dollar and the ongoing trade war, the US appears to be the only leading nation likely to continue to witness acceleration in economic growth, as the benefits of President Trump’s tax cuts unfold.

 

Expectations from this policy

With this interesting pattern of economic indicators, there certainly seems to be no impetus to reduce rates, since the economy is demonstrating strong growth and inflation has cooled. At the same time, the RBI may not want to burden corporates, which are already struggling with rising crude costs and a falling rupee, so the RBI may think twice about raising rates further.  However, with the global scenario deteriorating and the rupee still facing downward pressure, it still may be an option that the central bank considers. All things considered, the MPC is most likely to keep rates steady with a fair chance of raising them a little.

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