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RBI monetary policy review today; 0.25% rate cut expected

Mumbai: To reverse the impact of the demonetisation drive to growth prospects, the Reserve Bank is expected to cut rates on Wednesday.
“We continue to expect the RBI-MPC (monetary policy committee) to cut the rates by 0.25 percent on Wednesday and in April with demonetisation hurting growth,” foreign brokerage Bank of America Merill Lynch said.
The brokerage said 60 percent of 2,000 respondents surveyed by it reported that they have been impacted by the note ban and attributed the “surprising” November industrial growth of 5.6 percent to lower base effect.
Although banks and industry have been pitching for cut in benchmark repo rate (short-term lending rate), the six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel may adopt a cautious approach on February 8, especially in view of spike in crude oil prices and growing protectionist sentiment with Donald Trump taking charge as the US President.
The Economic Survey had pointed towards a 0.25-0.50 percent dent to growth prospects as a result of the note ban.
The expectation of inflation trending lower — the note ban impacted demand leading to lower price rise — was also cited as another important factor which will influence the MPC to cut rates, it said.
Other factors which will guide the RBI towards lowering the rates include Finance Minister Arun Jaitley cutting the fiscal deficit to 3.2 percent for next year and the dovish stance adopted by the US Fed.
It also wondered if the RBI will disclose the exact amount of scrapped currency notes received by it and estimated that the not-returned part to be around Rs 50,000 crore of the over Rs 15.55 trillion out in circulation on November 8, 2016.
On inflation, it said the RBI can scale down risks to the 5 percent March 2017 target from “upside” to “balanced” given the cooling in recent months and its estimate of the headline number coming in at 3.3 percent for January.
The brokerage also said it expects inflation to come down to 4.1 percent by March, which is 0.50 percent lower than the previous estimate of 4.6 percent.

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