A recent report stated that the Reserve Bank of India will continue to operate without changes in the repo rate. Uncertainty in the oil prices, monsoon, anticipated rise in inflation, and weak transmission of monetary policy are among the major factors affecting this. In addition, the bank also considers the implications of policies to be brought to action by the new government on growth and inflation.
RBI has scheduled its second bi-monthly monetary policy on June 6, 2019. Industry experts are expecting RBI to keep the policy rate changes on hold during the June meeting. Due to uncertainty in production losses from Iran, the report predicts that crude oil prices may remain high throughout the quarter.
The report also predicts an increase in food inflation over the year predicted based on the statistics indicated by the recent reports on consumer and wholesale prices. In April, headline CPI-based inflation was at flat 2.9% year-on-year.
Regarding the weather conditions, the India Meteorological Department (IMD) has predicted a normal monsoon. Whereas, a private firm, Skymet, states that the probability of El Nino conditions is over 60% through the summer. It also mentioned that there could be a deficient summer.
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Further, the report highlighted the weakness in monetary policy transmission, which poses as a major concern in the next monetary policy review. Since February, the repo rate has reduced by 50 basis points, i.e. 6%. As a result, bank lending rates have dropped by 5 basis points.
According to the report, a pickup is expected by the end of the year. It forecasts a GDP growth from 7.4% in 2019-20 to 7% in 2018-19. Another rate cut of 25 basis points is expected by the end of the third quarter of 2019. This is because inflation is expected to remain around 4% and growth below 7.7%. The US Federal Reserve would also remain diplomatic.
By the beginning of 2020, growth acceleration, headline inflation, and US Federal interest rates are expected to boost. On this basis, RBI will be pressurised to get back to a tightened guideline. A hike of 25 basis points in each of the first 2 quarters is expected of RBI.
The report states that the RBI may continue to add liquidity in the upcoming term. This will be achieved through open market operations (OMO), foreign exchange tools and regulatory measures.