Money & Banking

‘MPC likely to keep rates steady’

Our Bureau. Mumbai | Updated on November 29, 2020 Published on November 29, 2020

Inflation and growth forecasts may be revised higher, says Barclays Securities

The rate-setting Monetary Policy Committee (MPC) is likely to stand pat on the policy repo rate as retail inflation continues to remain sticky above its upper tolerance level of 6 per cent, even as the economy is showing signs of mending from the impact of Covid-19.

The MPC, which is scheduled to meet from December 2 to December 4, left the policy repo rate unchanged at 4 per cent in its previous two meetings as retail inflation has been above the tolerance band for several months.

Since the outbreak of the pandemic in India in March, the MPC has cut the repo rate cumulatively by 115 basis points in two tranches – 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.

Rahul Bajoria, Chief India Economist, Barclays Securities (India) Pvt Ltd, said: “We expect the Reserve Bank of India’s (RBI) monetary policy committee to keep rates steady next week, even though we expect its inflation and growth forecasts to be revised higher.”

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With the economy remaining on the path of a gradual recoveryand facing sticky supply-side price pressures, Barclays expects the RBI to stay on hold, maintain an accommodative stance, and continue to emphasise that a “durable improvement in growth” is needed before it would relook at policy settings.

“As such, we think nurturing growth will remain central to monetary policy and the RBI is likely to repeat the guidance provided in the October policy review,” said Bajoria.

In its October policy review, the committee decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target (of 4 per cent within a band of +/- 2 per cent) going forward.

CPI-based inflation rose to 7.61 per cent in October 2020 against 7.27 per cent in September 2020. GDP growth rebounded from a contraction of 23.9 per cent in Q1 (April-June) FY21 to a decline of 7.5 per cent in Q2 (July-September) FY21.

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According to Madan Sabnavis, Chief Economist, CARE Ratings, retail inflation is getting more generalised with food items, in particular, pushing up overall inflation. The reasons for the same are prolonged monsoon and destruction of crops in the Deccan area.

Higher fuel costs prompted by higher taxes has kept transport inflation on the higher side.

Sabnavis observed that inflation has been influenced by both taxes and increased prices. As unlocking begins, service providers have increased rates as they have to operate with lower capacity utilization.

“Inflation will remain elevated for the next few months. High inflation gives no scope to MPC to lower rates further this year. RBI action will be through the liquidity route henceforth,” he said.

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Published on November 29, 2020
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