Challenges before MPC

Why in news?

The Monetary Policy Committee (MPC) of RBI is set to decide its policy stance in the coming days.

What were the outcomes of the previous meeting?

The RBI's rate setting Monetary Policy Committee (MPC) has kept the repo rate unchanged at 6.5%.
The RBI has also changed its stance from ‘neutral’ to ‘calibrated tightening’.
This indicates that there will not be a rate cut in the near future and rates could either go up or stay steady in the future.

Is a rate cut likely in the upcoming meet?

There is an argument for a rate cut for several reasons.
The gross value added (GVA) growth rate for the second quarter shows the weakness in the economy.
GVA growth decelerated to 6.9% in this fiscal year, comparing to 8.5% in FY16, despite a favourable base effect.
Sequential GVA growth, too, showed that most key sectors such as agriculture, manufacturing, mining and construction decelerated.
On the inflation front, the retail inflation rate steadily declined from 3.77%(in September) to 3.31%(in October), where lower food inflation played a major part.
With the lower crude prices, Inflation is also expected to fall further to 3%, which is well below the RBI’s target of 4%.
The rupee too has recovered from over Rs.74 (to a dollar) to under Rs.70, serving as a challenge for exporters in boosting their earnings.
Thus, there is a need for lower ratesto boost the economic growth.

What are the concerns?

MPC’s change in stance from “neutral” to “calibrated tightening” ruled out any rate cuts in the near future.
But considering the liquidity scenario in the country, a rate hike seems inevitable.
The latest RBI data shows a liquidity deficit of Rs 620 billion in the banking system.
Also, higher rates affect private investments in the economy, creating a need for more and more government spending.
Thus the RBI is grappling with a dramatically different picture of the economy and should consider all these factors before deciding the policy rate.

Source: Business Standard