The RBI’s monetary policy committee (MPC) is likely to announce a pause in rate hikes in its policy announcement on December 5, 2018. The pause is likely to be aided by the lower headline inflation, which has been significantly lower than RBI’s target of 4%; the arrest of large outflows from India’s capital markets (in fact, November saw inflows of $1.3 billion which has led to the rupee appreciation); and a significant decline in crude oil prices (~30%) since October. All these factors will likely lead RBI to keep the rates unchanged. Moreover, the RBI seems to be focused on managing liquidity rather than exercising a tighter monetary policy, according to experts.
The RBI has delivered two rate hikes this year – one in June and the other in August – citing concerns on increasing inflation and growth. However, inflation has surprised the markets positively owing to low food inflation. Growth, which was dampened by demonetisation and the implementation of GST, has also started showing signs of strength.
In the last policy meeting which happened in October’18, markets were widely expecting RBI to hike repo rate for supporting depreciating currency and rising inflation on account of high oil prices. Yet, RBI chose to keep repo rates unchanged.
Since then, oil prices have cooled down to almost USD 62 per barrel from USD 86 per barrel. Exchange rate of Rupee Vs USD has also come down to Rs 70 per dollar from Rs 74 per dollar. Inflation has touched the lowest mark since September 2017.
Markets are also expecting RBI to maintain the status quo. This is being factored in the 10 year G-sec yields which have rallied by almost 20 bps in the past 15 days, currently standing at ~7.57 down from ~7.79.
According to a note issued by Edelweiss Financial, “We expect RBI to focus on addressing the systemic liquidity issues currently and in the backdrop of benign inflation the bank is likely to hold on to rates for now. However with core inflation pressure still continuing we expect RBI to maintain its ‘calibrated tightening’ stance in its 5th December policy announcement.”