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RBI Monetary policy: Will RBI play against the wind?

The US Federal Reserve raised interest rates by 25 basis points and signalled two more rate hikes in 2018 itself. This shows that US economy is on the go. Fed rates have been influencing the Indian Interest Rates. With this background RBI is going to come with its first monetary policy announcement after budget. What can we expect from the Governor?

Apart from global determinants, inflation, expectation inflation, consumption, liquidity , political situation are going to play a very important role. Let’s take a look at these  one by one.

If we see the inflation rate, it has reduced from what it once used to be a two digit figure to single digit figure. There is direct relationship between Interest rates and inflation rates which suggests interest rates should be lowered.

Expectation inflation is still in two digits as employees are expecting Salary hikes in Two Digit percentage. This gives a chance for increase in inflation rate. RBI needs to work a lot on this.

Consumption : India is still not able to catch its needs of domestic market. India is a big consumption theory. More consumptions lead to inflationary situations calling for a hike in Interest Rates.

Elections in major states and keeping 2019 in mind RBI is going to play wait and watch cards which is more likely in order. Apart from these, monsoon expectations and likely political scenario are the other factors RBI would prefer to watch for before taking any decision.

Industries are putting pressure to lower the interest rates. Inflation figures are also suggesting the same.  Amongst these, question comes, will RBI go against the Fed roadmap ?

Well, post demonetisation, flood in the liquidity has dried up. Banks have already made small increase in Interest Rates. RBI has also expressed its concern over credibility. India is showing a good development story. Banks are in need of funds. All these points apart from global indications are strong advocates of Interest Rate hike.

The Interest Rate differential between US and India was high and was creating market opportunities. This gap needs to be lowered. US is increasing its interest rate, whereas  in last few years India has lowered its  Interest rates, effectively reducing the gap. Can India dare to shorten this gap further? Countries like Japan, some European countries and even Thailand is operating at a lower 10 Year yield on Treasury Bonds than America.

Country First is the concept which is ruling the world today. We need to repose our confidence in RBI and the capabilities of the Government.  Though a status quo may be maintained in tomorrow’s  announcement, we expect the Interest Rate changes to be neutral to negative in coming 1 to 3 years span which is in line with our economy provided crude price stays in absorbable limits.

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