The Reserve Bank of India (RBI) is expected to hold key interest rates at its monetary policy review – its second after November’s note ban – in the wake of banks being flush with funds post-demonetisation and a firming up of global oil prices.
As a result of the surge in bank deposits following the recent demonetisation of high-value currency, lending rates have fallen by up to 1%.
Industry chamber FICCI, has said that the RBI is likely to maintain status quo in the upcoming monetary policy and cut rates in the first half of the next fiscal beginning April 1.
Earlier in December, the RBI’s Monetary Policy Committee (MPC), during its second bi-monthly monetary policy review — the fifth of the fiscal — kept the repurchase rate, or the short-term lending rate it charges on borrowings by commercial banks, unchanged at 6.25 %.
According to the panel, its decision to keep the key lending rates unchanged was taken after considering various global and local factors, such as a likely hike in the US interest rates, which has since been effected by the US Federal Reserve.
Moreover, acting as a further constraint for the central bank, retail inflation rose for the fifth straight month in December, touching 5.61 % on the back of higher vegetable and cereal prices.
In this connection, while state-run oil marketers failed to make the fortnightly revision in transport fuel prices due earlier this week, the Indian basket of crude oils closed trade on the last trading day on Thursday at over $55 a barrel, latest official data showed.
Rising oil prices present a challenge to India’s growth, said the Economic Survey presented in Parliament earlier this week.
“Price of crude oil (Indian basket) has increased from $39.9 in April 2016 to $52.7 in December 2016. For the next financial year, the recent uptick in global commodity prices, in particular crude oil prices, pose an upside risk,” it said.
While announcing its monetary policy review last month, the RBI, acknowledging the demonetisation factor, lowered its gross value added growth estimates for the current fiscal to 7.1 % from 7.6 % forecast earlier.
Meanwhile, with a key macroeconomic data showing services sector contracting for the third straight month in January, also provoked expectations of a rate cut by the RBI.
The Nikkei Services Purchasing Managers’ Index (PMI) survey showed that input cost inflation slowed since December, while average selling prices contracted again, which may prompt the RBI to be “accommodative” at its forthcoming monetary policy review.