Later in the week, the Monetary Policy Committee of the Reserve Bank of India is set to review the policy rate. Most observers believe that it might not effect any change in the basic rates, though the Government, like all previous governments, would be keen on at least at least a 25-basis point cut in the Prime Lending Rate.
However, the government’s wish is unlikely to be fulfilled. The reason is simple. The global crude oil prices are hardening, having increased in the last couple of months from an average of $ 40-45 a barrel to $ 60-65 a barrel. And the uncertain conditions in West Asia suggest that these may rise further. Besides, the food prices, especially of vegetables and fruits, have shot up in recent weeks. The MPC mandate to keep inflation within the stipulated range between four to six percent takes priority over all other considerations, including growth.
The recovery seen in the last quarter is essentially due to the wearing off of the effects of the disruptions caused by the GST implementation and the earlier demonetization. The MPC might feel encouraged to maintain the present rates in view of the uptick in the growth rate in the last quarter, believing that its intervention should await till after the economy gets back to an even keel after the recent twin shocks. The fine-tuning of the GST is still underway and the MPC might like to wait for the process to end before it can gauge the full impact of stabilization of the progressive tax on the economy.
Given that the process of recapitalization of banks is proceeding hand in hand with the cleaning up of their books by making the defaulters accountable, it is only reasonable that further intervention by way of a PLR change await at least another quarter. A PLR of six percent is certainly high, especially when there is need to pep up the economic engine after the recent twin shocks. But in view of the lack of credit demand and widespread red ink in the corporate balance sheets, a wait-and-watch approach on the bank rate might be the best under the current circumstances.
Also, after the outcome of the Assembly polls in Himachal Pradesh and Gujarat is known on December 18, things might clarify further on the economic front with the Modi Government expected to undertake further reforms, especially in case of a strong win for the BJP in the two States. In other words, a no-change stance by the MPC will not be unexpected.