INSUBCONTINENT EXCLUSIVE:
Government is bound to be pleased if RBI keeps key rates on hold.The Reserve Bank of India will probably keep interest rates unchanged on
Wednesday, with the decision itself likely to be a sideshow to Governor Urjit Patel's press conference -- his first since an acrimonious
debate with the government over the central bank's autonomy
Investors are watching how Patel will respond to the state's push for more say over the central bank's role
Economic Secretary Subhash Chandra Garg, a government representative on the RBI's board, has called for the bank's governance structure to
be changed and panels set up to oversee its functioning.After raising interest rates twice this year, the RBI will probably keep its
repurchase rate unchanged at 6.5 per cent, according to 48 of 52 economists surveyed by Bloomberg
That decision is bound to appease the government, which is seeking more support for banks to continue lending.The RBI will issue a statement
in Mumbai followed by a press conference by Patel 15 minutes later
Here's a look at what else to watch out for:Tight LiquiditySince the last meeting in October, liquidity in the financial system has
declined, forcing lenders to raise rates
Some of the reasons include sales tax payments to the government, a seasonal pick-up in loans and intervention by the central bank in the
foreign-exchange market to prop up the rupee.The RBI may seek to assure investors about liquidity conditions by stepping up bond purchases
and pumping more cash into the system
The central bank -- which has limited its bond purchases to Rs 40,000 crore ($5.7 billion) a month since October -- is expected to increase
that to Rs 50,000 crore a month in the March quarter, according to Indranil Sen Gupta, an India economist at Bank of America Merrill
Lynch.Subdued InflationFirst the good news
Inflation eased to a 13-month low of 3.31 per cent in October, well below the 3.9 per cent lower end of the RBI's forecast range for the
second half of the financial year to March
The miss may prompt the RBI to lower inflation projections amid a slide in the price of crude oil, the nation's top import, and a rebound in
the rupee from record lows.Now to the bad news
A subdued inflation reading on account of falling food prices is likely to translate into lower incomes for farmers, which in turn could be
a drag on economic growth
Higher guaranteed crop prices announced by the government hasn't really been of much help so far."If public sector construction slows
following the national elections in 2019 as the government shifts its focus back to fiscal consolidation, we believe that rural incomes, and
with them food inflation, will remain contained for longer," said Pranjul Bhandari, chief India economist at HSBC Holdings Plc.Slower
GrowthGross domestic product growth in the July-September quarter was disappointing, slowing to 7.1 per cent from 8.2 per cent in the
previous three months to June.While activity might rebound as some high-frequency data suggest, consumption -- the backbone of the economy
-- is likely to suffer due to tighter liquidity conditions stemming from the shadow banking sector.Prachi Mishra, chief India economist at
Goldman Sachs Group Inc., estimates the cash crunch could lower its growth forecast for the current fiscal year by 12 to 21 basis points.
