EXPLAINER: RBI’s Monetary Policy Committee meeting begins today; what to expect

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on Monday commenced its three-day meeting to determine the policy repo rate, which is significant to achieve the inflation target and sustainable economic growth. The policy decision will be announced on Wednesday.

The repo rate currently stands at 5.5 per cent. The RBI had cut the repo rate by 25 basis points in its February and April meetings, each followed by a 50 basis points cut in June. However, experts believe that the RBI MPC may take a breather in August and expect the next rate cut of 25 basis points in October.

What is the MPC

The MPC is a six-member committee, being constituted under Section 45ZB of the amended RBI Act, 1934. The first such MPC was constituted on September 29, 2016.

The members consist of — Governor of the RBI, Chairperson, ex-officio; deputy governor; one officer of the RBI and three external members, typically economists or experts in finance, appointed by the Central government for a four-year term.

The MPC is required to meet at least four times in a year. Each member has one vote; and in the event of a tie, the RBI Governor has a second or casting vote.

When does RBI change repo rate

The MPC holds a meeting once in every two months to review a range of economic indicators, such as inflation trends, economic growth, global economic conditions, and domestic financial conditions. Based on these indicators, the MPC decides whether to increase, decrease or maintain the repo rate. Following each meeting, the RBI also releases inflation and GDP growth projections for the upcoming quarter.

The changes in repo rate influence the loan interest rates and deposit rates. If RBI reduces the repo rate, it leads to reduction in borrowing rates which in turn benefit the growth with more investment. It is particularly welcomed by consumers looking to borrow for home. A repo rate hike, on the other hand, highlights concerns about inflation. The RBI hikes repo rate to cool demand and tame the inflation.

What to expect

Nomura, the Japanese financial services company, indicated that the RBI’s 50 basis points cut in June and stance change to neutral have raised the bar for a cut in August. “…but we believe the probability of a cut in August has risen to 35 per cent (from Rs 10 per cent earlier). We maintain our view that the RBI’s rate cutting cycle is not over, despite the change in its stance to neutral. We expect 25 basis points cuts each in October and December to a terminal repo rate of 5.00 per cent by year-end, with risks skewed towards further cuts,” Nomura said.

Nomura also expects CPI inflation to undershoot. “Daily data for July suggest headline inflation is tracking Rs 1.4 per cent y-o-y, breaching the lower end of the RBI’s tolerance band of 2-6 per cent (midpoint: 4 per cent). Lower food prices, lower global commodity prices, rising China imports, weak domestic demand and moderating wage growth all point to low inflation sustaining,” it said.

Meanwhile, Barclays believe that having cut the repo rate by 100 basis points in quick succession over the last three policy meetings, it expects the MPC to take a breather in the August meeting, and deliver a dovish pause, while retaining the stance as ‘neutral’.

“That’s not to say that the rate easing cycle in India is over, but it’s just about there. We expect the final 25bp cut of this easing cycle in October,” it said.

Barclays also expects the MPC to likely revise down the CPI inflation forecast of 3.7 per cent by 30-40 basis points in the upcoming meeting, while retaining their GDP growth forecast.