WITH NOTE BAN IN FOCUS, URJIT PATEL HAS HIS TASK CUT OUT

All eyes will be on RBI governor Urjit Patel when he announces the credit policy review on December 7, the first one since the government announced its demonetisation drive.

“We are looking at a 25 basis point reduction in the key policy (repo) rate given the flush of liquidity in the system,” said Shubhada Rao, chief economist with Yes Bank.

Barring very few statements that the Reserve Bank of India (RBI) is managing to increase cash supply, Patel has not spoken much on deposits, economic costs, growth outlook, inflation and the impact of demonetisation.

This will be Patel’s second monetary policy after taking over as RBI chief on September 4.

The repo rate currently stands at 6.25%. It is the rate at which banks borrow short term funds from the central bank in case of a shortfall.

So, in the middle of the cash crunch, shortage of R500 notes, long queues at ATMs and bank branches, the six-member Monetary Policy Committee (MPC) will start its two-day meeting on Tuesday. In case of a tie, the RBI governor will have the casting vote.

“We are factoring in a repo rate cut of 50 bps on December 7 policy,” SBI’s chief economic adviser Soumya Kanti Ghosh said. “With a 17% decline in mandi m-o-m (month-on-month) prices, CPI inflation could be close to 3.5% in November.”

This is broadly in line with RBI’s 5% inflation target by March 2017, and the government’s 4% target for the next five years.

Retail or CPI (consumer price index)-based inflation fell to a 14-month low of 4.20% in October (from 4.31% in September), while the one based on wholesale prices or WPI fell for the second consecutive month to 3.39% in October.