The Monetary Policy Committee (MPC) is seen unanimously voting to continue status quo on the policy repo rate as a solid increase in aggregate demand is yet to take shape even as the retail inflation print in May and June was above its upper tolerance level.

The six-member MPC has kept the repo rate (the interest rate at which banks borrow from the Reserve Bank of India to overcome short-term liquidity mismatches) steady at 4 per cent since it last cut this rate by 40 basis points from 4.40 per cent in May 2020.

115 bps cut since last March

Overall, since the onset of the Covid-19 pandemic in March 2020 in India, the repo rate has been cut by 115 basis points to mitigate its impact on the economy.

The Committee is also expected to persist with its accommodative stance to support growth till it gains traction on a durable basis while ensuring inflation remains within the target of 4 per cent with the lower and the upper tolerance band of 2 per cent and 6 per cent, respectively.

According to the RBI’s latest monthly bulletin: “While several high frequency indicators of activity are recovering, a solid increase in aggregate demand is yet to take shape... A pick-up in inflation is driven largely by adverse supply shocks and sector-specific demand-supply mismatches caused by the pandemic. These factors should ease over the year as supply side measures take effect.”

Rahul Bajoria, Chief Economist, Barclays Securities (India), observed that while the Covid caseload has declined significantly since April, the overall trajectory of economic variables has not changed sufficiently to warrant any material change in the RBI’s policy stance in the August MPC meeting.

He expects the RBI to keep rates unchanged in August as well as continue to buy bonds for some time under the G-SAP (Government Securities Acquisition Programme). The MPC is also expected to maintain an accommodative policy stance.

“Our reading of high frequency activity indicators suggest no reason for the RBI to adjust its overall growth outlook, though its inflation forecasts may need to be revised modestly higher,” Bajoria said.

Unlikely to rock the boat

Radhika Rao, Senior Economist, DBS, said that the MPC is unlikely to rock the (policy) boat in its August bi-monthly monetary policy review, opting to keep the repo rate at 4 per cent and the policy corridor unchanged. “Forward guidance will favour a continuation of the accommodative policy stance to guard against growth risks, especially the third Covid wave,” she said.

“The accompanying commentary will heed inflation risks through close monitoring and refrain from tweaking the policy levers for now,” Rao said in a report.

According to the DBS report, the preference to gradually draw out excess liquidity might increase the sizes of variable reverse repo rate (VRRR) auctions while reaffirming support for the ongoing G-SAP program.

The impact of a VRRR increase might be marginal given the scale of surplus liquidity (estimated at ₹7.5-8 lakh crore) – bank liquidity plus government cash balances.

“Nonetheless, it affirms the central bank’s intent to mop-up liquidity at a calibrated pace before setting the stage for a reverse repo increase and change in policy stance around the end of 2021 or early 2022,” Rao said.