A lot is projected for the monetary policy review that is going to be announced today by the Reserve Bank of India (RBI). This can be said as it will lay down the further management of money supply and interest rates. Also the macroeconomic objectives regarding inflation, growth, liquidity and consumption will be addressed therein. For this, all eyes are set on the developments in the interest rates. The RBI has, so far, cut the rates three times this year in order to loosen credit and boost the economic growth. Will there be another rate cut by the RBI? This can't be answered with accuracy. It can be only gauged by evaluating the factors that affect it. Some of those are the wholesale price index, consumer prices, growth rate and the US rate hike. Let's have a look at all of these factors to know where the interest rate will settle.
CPI and WPI
As per an article in Livemint, there is a wide divergence in the Consumer Price Index (CPI) and Wholesale Price Index (WPI). India has seen wholesale price deflation for eight months in a row. On the other hand, consumer prices touched their nine-month high in the month of June. For this, the finance ministry has suggested RBI to take the course of wholesale prices into account. Moreover, consumer prices being the nominal anchor of monetary policy should be taken into consideration by the RBI. It is expected that the CPI will decline following the downturn in the global oil prices. Still, some room remains if food prices go up and RBI will be considering it too.
Monsoon and Growth rate
Deprived monsoon can be a threat to the inflation and growth of our economy. Despite the lower than average monsoon forecast for the year, the first two months of monsoon came out favorable than expected. Reports for the industrial output, profit growth and bank credit shows that the overall momentum is picking up. By knowing this it can be said that the economic growth forecast can be assumed to be on positive side this year.
US interest rate hike
The announcement by Federal Reserve Chair Janet Yellen to set the stage for a possible interest rate hike in September has created a spur. Central banks of some emerging markets have already pushed up interest rates in a bid to protect their currencies. For this aspect the RBI, too, needs to be cautious of a sudden spell of global risk aversion. A sharp fall in the Indian rupee due to the US rate hike can threaten the financial stability of the unhedged dollar liabilities of large companies. Any further change in the interest rates will be determined after taking this situation under consideration.
Will RBI raise the interest rates?
Some of the above pieces can be argued in favor of holding interest rates at their current level. Moreover, the recent decline in global oil prices has served the government fiscal space to spend more, for which there won't be any need for further alteration. However, on the other hand, India Inc is pitching for a rate cut because of low wholesale inflation and slowdown in industrial growth. Further, the retail inflation has been stuck at high levels. After looking at the above scenarios, we can say for now that the RBI is going to have a tough call on the monetary policy this time. Nonetheless, what we can expect from RBI is to bring the inflation level closer to global levels and boost up growth by encouraging the investment cycle.