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The Reserve Bank of India's six-member interest rate panel started its three-day meeting on Tuesday amidst Union Budget projecting a higher fiscal deficit, slowing growth and rising inflation.
The Monetary Policy Committee (MPC), which new Deputy Governor Michael Patra has been given charge of to steer, has the mandate to contain retail inflation based on Consumer Price Index (CPI) at 4 per cent (+/-2 per cent).
The retail inflation, after remaining in comfort zone, started inching up and crossed the 7 per cent mark (7.35 per cent) during December 2019, due to spiralling prices of vegetables led by onions. It is now very clear that MPC members will have a tough time balancing between a slowing economy which calls for reduction in repo rate, while rising inflation and higher fiscal deficit will require the RBI to either hike the rate or at best, maintain a status quo.
The sixth bi-monthly monetary policy statement for 2019-20 will be announced at 11.45 a.m. on Thursday.
The macro stats are not very bright. The government has estimated India's gross domestic product (GDP) at 5 per cent in the current financial year owing to both domestic as well as global factors amid weakening consumption demand in the country.
In December, the retail inflation also peaked to a five-year high of 7.3 per cent, mainly due to costlier vegetables, specifically onions and tomatos.
In its previous monetary policy review in December, the RBI had decided for a status quo, leaving the repo unchanged at 5.15 per cent on concerns of rising inflation.
While presenting the Union Budget on Saturday, Finance Minister Nirmala Sitharaman projected the fiscal deficit to widen to 3.8 per cent of the GDP against the earlier estimate of 3.3 per cent. A higher fiscal deficit in simple terms means the government will go in for more market borrowing leading to hardening of interest rate which in turn will put pressure on inflation but the government has ruled out any borrowing this fiscal.