Monetary policy: RBI likely to hold repo rate steady

Our Bureau Mumbai | Updated on September 27, 2020

The monetary policy committee (MPC) may stand pat on the policy repo rate as the August 2020 retail inflation reading of 6.69 per cent was above its upper tolerance level of 6 per cent.

This leaves it with little wiggle room to cut the rate further to revive the economy, which is reeling under the impact of the Covid-19 pandemic.

While the GDP contraction of 23.9 per cent in the first quarter is definitely a cause for concern, the MPC has already delivered a cumulative 115 basis points cut (since March 27, 2020 till date) in the policy repo rate to revive the fortunes of the pandemic ravaged economy.

The committee may want the previous two repo rate cuts (from 5.15 per cent to 4.40 per cent on March 27 and from 4.40 per cent to 4 per cent on May 22) to work their way into the lending rates and also keep the powder dry when retail inflation eases.

The six member committee had left the policy repo rate unchanged (the interest rate at which banks draw liquidity from the Reserve Bank of India to overcome short-term mismatches) at its last meeting (from August 4 to 6, 2020).

Uncertainty on inflation-growth outlook

The MPC’s last resolution underscored that given the uncertainty surrounding the inflation outlook and taking into consideration the extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, it is prudent to pause and remain watchful for incoming data as to how the outlook unravels.

Brickwork Ratings (BWR), in a note, said with the current level of inflation and prevailing uncertainty over the growth outlook, the MPC is expected to adopt a wait-and-watch approach and hold the repo rate at 4 per cent, and continue with its accommodative monetary policy stance in its October meeting.

“The pandemic is still evolving, and credit offtake, even at a low rate of interest, looks sticky. With uncertainty regarding the pandemic looming large, the RBI may not provide a GDP forecast for FY21 in the upcoming MPC meeting.

“As in the previous statements, the RBI may continue to talk about economic contraction without quantifying the magnitude,” M Govinda Rao, Chief Economic Adviser, and Rajat Bahl, Chief Ratings Office, BWR.

RBI: Inflation constrained

Rahul Bajoria, Chief India Economist, Barclays Securities (India) Pvt Ltd, observed that price trends since the last policy meeting have shown that headline CPI (consumer price index based inflation) has remained above the RBI’s target, and a “durable reduction” has not manifested, which would allow the RBI to consider alternative policy options.

On the other hand, there are some signs of improvement that activity is starting to return to normal as lockdown restrictions are eased.

“As such, India’s inflation-constrained central bank is unlikely to deliver a rate cut, and we expect all policy rates – the repo rate, the reverse repo rate and the cash reserve ratio – to stay unchanged. We expect RBI to cut rates only once more, by 25 basis points, in Q1 (January-March) 2021,” Bajoria said.

The committee, headed by RBI Governor Shaktikant Das, is scheduled to meet for three days beginning September 30.

It is entrusted with the task of fixing the policy repo rate required to contain inflation within the specified target level (of 4 per cent, with an upper and lower tolerance level of 6 per cent and 2 per cent, respectively) for maintaining price stability, while keeping in mind the objective of growth.

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Published on September 27, 2020
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