Tough Time for Reserve Bank of India

The six-member Monetary Policy Committee (MPC) of the RBI has a tough job in hand as there is a growing concern about the widening difference between income and expenditure of the union government and high consumer prices.

Mumbai:Economists are keen on Reserve Bank of India’s (RBI) policy announcements on Thursday.

The six-member Monetary Policy Committee (MPC) of the RBI has a tough job in hand as there is a growing concern about the widening difference between income and expenditure of the union government and high consumer prices.

While presenting the Union Budget on February 1, Finance Minister Nirmala Sitharaman projected the fiscal deficit to widen to 3.8 per cent of Gross Domestic Product (GDP) against the earlier estimate of 3.3 per cent.

Besides, official data shows, retail inflation in December touched 7.3% due to high onion and tomato prices. This figure is 1.3% higher than RBI’s comfort limit of 6%.

A higher fiscal deficit in simple terms means the government will go in for more market borrowing leading to hardening of interest rate which in turn will put pressure on inflation.

The Central Bank has three options to choose from – not changing repo rate, reducing it and repo rate hike. Repo Rate is the key policy rate that influences money flow in the market, which in turn has a say on growth prospects and prices.

Experts divided on which one is the right choice given the need to boost growth and contain rising prices.

While experts rule out repo rate hike given the need for liquidity in the market, the choice will be between reducing repo rate from the current 5.15% and maintaining the status quo.

Status quo may disappoint industrialists looking for much cheaper credit to kick start new projects, whereas reducing repo rate likely to trigger further inflation.

Some suggest that the RBI can maintain the status quo for now with an understanding of rate cut in the coming months.

“Since budget announcements are not inflationary in nature, Reserve Bank can cut rates as early as in the June review”, a report by HDFC Bank's economists said.

The MPC reviews the Repo Rate every two months and the repo rate for February and March will be announced at 11.45 on Thursday.

(With inputs from PTI)