Monetary Policy Review On Oct 4; RBI To Maintain Status Quo?

The fourth bi-monthly monetary policy review for this fiscal year is to be announced by the RBI on 4th October 2017. It will be seventh monetary policy review by Dr. Urjit Patel, RBI’s Governor and the Monetary Policy Committee.

CARE Ratings expects status quo in the policy stance. This policy review is in the backdrop of inflation with an upward bias, moderation in economic growth, a decline in bank credit and bank deposits growth, increasing GSecs yields and sudden depreciation of the rupee vis-à-vis dollar.

Care Ratings analyses the Factors favoring a status quo. According to it “Upside risks to inflation may emanate from the following major factors that could lead RBI to maintain status quo on policy rates in the October monetary policy meet.

The Reasons…

Fall in crop sowing area by 7.7 lakh hectares this year compared with a year ago levels resulting in lower farm production.

Changes in tax rates on account of GST could also be a cause for concern on inflation.

Inflation in housing Index with the implementation of 7th pay commission.

Increase in prices of imports on account of recent rupee depreciation and increasing crude oil prices.

Expectations of the Fed increasing rates. Unchanged rates will continue to attract FPI now that the investment limits in government debt have been increased.

Economic Backdrop

  1. GDP growth

The Indian economy in the first quarter of FY18 grew at the slowest pace in 5 years. The Q1FY18 GDP came in at 5.7%, a marked decline from the 7.9% growth in the corresponding period last year. The subdued and weakened economic performance of the economy was mainly on account of disruptions caused by demonetization and GST implementation, which could be temporary in nature. However, the SME segment has been under more pressure and would take some more time to normalize operations.

  1. IIP growth

The cumulative growth in industrial output in the first four months of the current financial year was a mere 1.7%, compared with 6.5% growth for the comparable period a year ago. Subdued manufacturing and mining activity resulted in lower growth numbers for the period that was mainly attributed to the continued business disruptions caused by the implementation of GST. In addition to this, the sharp contraction in capital goods is reflective of limited private investments in the economy.

  1. Agricultural growth

The total area under cultivation declined by 0.7% to 1049.42 lakh hectares as of 15th September’2017 compared with corresponding period last year, with particularly sharp reductions in oilseeds (-8.8%) and pulses (-3.5%) on account of uneven geographic spread of monsoons as well as deviations in the month-wise distribution of rainfall compared with the long period average. The first advance estimates presented expect lower output in rice, maize, soybean, groundnut, tur and moong. This would be of concern from the point of view of supplies as well as food inflation which will have a bearing on policy decisions on interest rates.

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S Kapeed