Monetary Policy on Feb 8: Investors cross fingers

All eyes will be on the Reserve Bank of India (RBI) on February 8, as the six-member monetary policy committee (MPC) headed by RBI Governor, Urjit Patel will announce the much-awaited sixth bi-monthly monetary policy statement 2016-17 at 2:30 pm.

Apart from this, some key issues are also likely to be discussed, which would be closely studied by the economists and analysts, as the market expects a reduction in interest rates.

The market is looking forward to the monetary policy, with an expectation of a reduction in repo rate (short-term lending rate) by 25 basis points (bps) to 6 per cent. One bps is a hundredth of a percentage point. The government's fiscal deficit target of 3.2 per cent for financial year 2017-18 would help in making this decision more effective. 

Besides, the RBI is also planning to keep retail inflation under 5 per cent in the fourth quarter; and under 4 per cent in the medium term. The analysts believe that the assessment of the inflation situation by RBI would play an important role in understanding future rate movements.

However, this is the second RBI monetary policy announcement since the removal of Rs 500 and Rs 1,000 currency notes from circulation. In the last monetary policy announcement, not much was discussed on the impact of demonetisation on the economy. What we need to understand is that even the economists, at this stage would be unable to gauge appropriately the consequence of removing 86 per cent of currency notes by value from circulation, and would not be in a position to chalk out statistically accurate dynamics for the near future, and even though expectations are rife for a rate cut, we may be in for a surprise, like the one we received in the fifth bi-monthly review.