All Eyes of RBI Monetary Policy for August

When the Reserve Bank of India (RBI) decided to hike policy repo rate by 25 basis points to 6.25% from previous 6% in June policy, experts were of the opinion that similar action is going to continue for another two policies. However, two opinions have now emerged. There is a section of analysts that believes the RBI will decide to maintain a status quo in August policy, which is scheduled for tomorrow, another section still reiterates that a rate hike is on cards. The RBI meet will be chaired by RBI Governor Urjit Patel and six-member Monetary Policy Committee (MPC).

Firstly, one needs to remember that RBI is an inflation trajectory central bank and its policy decisions are derived from the performance of Consumer Price Index (CPI) or retail inflation.

The reason behind rate hike in previous policy was due to a list of factors that surround CPI, which will keep the indicator under pressure going ahead. RBI revised and projected CPI inflation for 2018-19 to 4.8-4.9 per cent in H1 and 4.7 per cent in H2, including the HRA impact for central government employees, with risks tilted to the upside.

Excluding the impact of HRA revisions, CPI inflation is projected at 4.6 per cent in H1 and 4.7 per cent in H2.

India's retail inflation for month of June has gone up to 5 per cent compared to 4.87 per cent in May 2018, according to government data released by the Central Statistics Office.

Driven by higher fuel prices and a depreciating rupee, the forecasts for June ranged from 4 per cent to 6 percent. June was the eighth straight month in which inflation was higher than the central bank`s medium-term target of 4 percent.

Considering the above, whether RBI decides to maintain status quo or a rate hike, we will have to wait and watch. But for now lets understand what is driving CPI currently, which will surround the RBI’s decision.

As per Edelweiss Financial Services, adjusted core CPI has been on continuous disinflationary path since June 2014. In fact, in 2016, while core CPI stopped disinflating owing to rise in petrol and diesel prices, adjusted core CPI continued to disinflate, touching a low of 3.7% in June 2017. However, in the past one year, this has risen sharply and is likely to touch ~5.7% in June.

Further, the increase in core CPI, though reasonably broad-based, is more pronounced in services compared to goods. This broad-based rise in core CPI has raised concerns amongst analysts and policymakers.