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The Monetary Policy Committee (MPC) is expected to retain the policy repo rate at 4 per cent owing to the concerns around core inflation, CARE Rating said in a report.
In this regard, the credit rating agency also pointed to the widening fiscal deficit and normalisation of economic activities, which could weigh on the inflation outlook
CARE expects the accommodative monetary policy to continue.
The Reserve Bank of India (RBI) will be announcing the results of voting on the repo rate and monetary policy stance by the six member MPC on February 5, 2021.
The policy repo rate, which is the interest rate at which banks borrow funds from the RBI to overcome short-term liquidity mismatches, has remained unchanged since the last cut in May 2020. There was a cumulative reduction of 115 basis points (bps) during the March to May 2020 period from 5.15 per cent to 4 per cent.
The agency observed that retail inflation, which remained elevated and above the RBI’s flexible inflation target (4 per cent +/- 2 per cent) for 8 consecutive months, registered a perceptible fall in December 2020 to 4.6 per cent, which is at a 15-month low. The decline in retail inflation can be broadly ascribed to fall in food prices and high statistical base effect.
“Core inflation (excludes food and fuel) for December 2020 stood at 5.7 per cent and it has remained range-bound from July 2020 onwards. Elevated core inflation continues to remain a challenge for the RBI’s MPC,” said Sushant Hede, Associate Economist.
CARE expects retail inflation to move towards 5.5 per cent by March 2021. With the Economic Survey and Budget 2021-22 already providing its estimates on the growth outlook for the Indian economy, growth projections from the RBI for the coming fiscal will be closely monitored, it added.
The agency observed that pursuant to the projection of a resilient V-shaped recovery in the Indian economy by the Indian Economy Survey, albeit on a lower size of the economy and the large government market borrowing program announced in the Budget for both the Centre and States, the RBI’s policy action will focus on balancing liquidity in the financial system while keeping inflation within its target band.
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