RBI Monetary policy: Will Urjit Patel bite the bullet on interest rates?
Reuters | Photo Credit: Reuters

On Monday, the newly constituted Monetary Policy Committee of the Reserve Bank of India will meet for the first time to deliberate on the central bank’s monetary policy. There is intense speculation on whether the central bank, which has a new chief in Urjit Patel, will move to cut interest rates. Here’s all that can be expected from the two-day meet.

What exactly is the Monetary Policy Committee (MPC)?

The MPC is a six-member body that comprises three members each from the RBI and academia. The members from the academia are from the Indian Statistical Institute, Delhi, Indian Institute of Management, Ahmedabad and the Delhi School of Economics.

How will the MPC work and decide on interest rates?

The MPC will work on data and inputs given by the central bank and come up with a decision on policy rates by Tuesday afternoon, after deliberating upon it all of Monday and the first half of Tuesday. The new RBI governor will have a casting vote in case of a tie.

What will be the key factors that the MPC will consider while deciding on the interest rate?

The major factor will, of course, remain inflation, which has been easing of late. Spurred by rising food prices, between April and July this year, retail inflation rose from just under 5.4% to 6.07%, but was down to 5.05% in August. It is expected to drop further in the coming months, especially in the wake of a good monsoon, and is likely to remain under the RBI’s 5% target for March 2017. Yet, some upside risks, including the possibility of rise in oil prices, following announcement of production cuts by the Organisation of Petroleum Exporting Countries last week, remains. Further, the pay commission bonanza and the Goods and Services Tax, which is likely to be implemented from April 2017, could also be inflationary. Moreover, at 6.5%, the benchmark interest rate is already at a five year low. The MPC will have to consider all these factors while taking a call on interest rates on Tuesday.

So, what are the chances of the RBI cutting interest rates in October?

No one can really say for sure, as Patel has given few indications of what he and his colleagues at the central bank are thinking. Yet, if news reports are to be believed, in a closed door interaction with economists earlier this month, he had indicated that the RBI could hold off on the interest rates for now and go in for a cut in December. Moreover, by then there will be clarity on the direction the US Federal Reserve will take on its interest rates. Last month the Fed had left rates unchanged, but is expected to go in for a hike towards the end of the year. 

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