RBI MPC: 5 Things To Watch Out For In August Bi-Monthly Monetary Policy

The RBI’s Monetary Policy Committee (MPC) is set to announce its decision on key interest rates on Friday (August 5), at a time when the central banks globally are raising policy rates and inflation soaring. An analysts’ poll conducted by News18.com suggests a hike of 25-50 basis points (bps) in the repo rate, with most experts talking about a 35-bp hike. Here’re key things to watch out for in today’s monetary policy announcement:

Interest Rate Decisions

The Reserve Bank of India’s MPC will on Friday most probably increase the key repo rate to control inflation. Economists differ on the policy rate hike from a 25-basis-point increase to a 50-basis-point rise. Repo rate is the rate at which the RBI provides short-term loan to banks.

Apart from the repo, the MPC’s decision on the bank rate (the rate at which the RBI lends money to banks for a long-term tenure), the reverse repo rate (the rate at which the RBI borrows from banks), the standing deposit facility (SDF) and the marginal standing facility (MSF) will be watched out for.

In the previous bi-monthly monetary policy in June, the RBI’s rate-setting panel had fixed the reverse repo rate at 3.35 per cent, bank rate at 5.15 per cent, SDF at 4.65 per cent and MSF at 5.15 per cent.

Monetary Policy Stance For Future Policies

The MPC’s policy stance will be the key to watch out for, as it will indicate future policy actions of the RBI. In the off-cycle policy review in May 2022, the MPC had decided to “remain accommodative while focusing on the withdrawal of accommodation”; while in the June 2022 policy review, it decided to “remain focused on the withdrawal of accommodation”. The RBI’s accommodative stance means easy monetary policy.

Mandar Pitale, head (treasury) at SBM Bank India, said, “We expect a 50-bp hike in August with continued emphasis on the need for more tightening in the rest of the year.”

Inflation Forecast

As the inflation in India continues to remain beyond the RBI’s target of 2-6 per cent, the central bank of India’s commentary on inflation will be the key focus area. The retail inflation in June eased slightly to 7.01 per cent, from the 7.04 per cent recorded in May. It had stood at 7.79 per cent in April.

In the previous policy statement in June, the RBI had kept the inflation forecast for the current financial year 2022-23 at 6.4 per cent, compared with the 5.7 per cent projected earlier. Rating agency Crisil in its latest report expects the retail inflation to stand at 6.8 per cent in FY23.

GDP Forecast

In the June monetary policy review, the RBI retained its GDP projection at 7.2 per cent for the current financial year 2022-23. “The real GDP growth projection for 2022-23 is retained at 7.2 per cent, with Q1 at 16.2 per cent; Q2 at 6.2 per cent; Q3 at 4.1 per cent; and Q4 at 4.0 per cent, with risks broadly balanced,” RBI Governor Shaktikanta Das had said while announcing the policy.

SBM Bank India’s Pitale said, “At present, the macroeconomic conditions are relatively better. Commodity prices are showing a downward trend. Oil prices are off peak (brent near $100). FPIs have turned net buyers of Indian stocks in July.”

The Index of Industrial Production (IIP) in latest May data showed a double-digit growth at 19.6 per cent and is an 11th-month high despite a high base of May 2021. However, last week in July, the International Monetary Fund (IMF) slashed India’s FY23 growth outlook to 7.4 per cent from 8.2 per cent forecast in April.

Other Announcements

Other key announcements of the RBI related to loans, UPI transactions, cryptocurrencies, liquidity, and cooperative banks, among others, will also be watched out for.

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