Money & Banking

RBI seen leaving repo rate unchanged in first review of FY22

Our Bureau Mumbai | Updated on April 04, 2021

To persist with accommodative stance as recovery still tentative amid rising Covid cases

The Monetary Policy Committee (MPC) is likely to leave the signal repo rate unchanged in the first bi-monthly Monetary Policy Review of 2021-22 as economic recovery is still tentative and retail inflation, though within the tolerance band, surged in February.

The six-member MPC has kept the repo rate (the interest at which the Reserve Bank of India provides liquidity to banks to overcome short-term mismatches) steady at 4 per cent in the last four bi-monthly Monetary Policy Reviews.

The last time the repo rate was changed was in May 2020, when it was cut from 4.40 per cent to 4 per cent. Then the reverse repo rate (the interest rate banks earn for parking surplus liquidity with the RBI) was also cut from 3.75 per cent to 3.35 per cent.

The second Covid-19 wave and its impact on the economy is expected to figure prominently in MPC’s deliberations that will start on Monday and go on till Wednesday. The committee is expected to persist with the accommodative monetary policy stance.

The meeting is also taking place in the backdrop of the February reading of the output of eight core infrastructure sectors showing a 4.6 per cent (year-on-year) contraction and retail inflation (consumer price index — CPI) rising nearly one percentage point to 5.03 per cent, from 4.06 per cent in January.

Edelweiss Securities expects the RBI to leave rates unchanged and stick to its accommodative stance. “Economic recovery is still uneven and the pace of improvement has slowed of late after a sharp rebound from lows (IIP has averaged just about 0.6 per cent YoY in the past five months). Further, the recent rebound in Covid cases poses a fresh challenge. Thus, continued policy accommodation is very much warranted,” it said in a report.

Rahul Bajoria, Chief India Economist, Barclays Securities (India) Pvt Ltd, and Shreya Sodhani, Research Analyst, Barclays Investment Bank, Singapore, in a report, said:“We believe the RBI can maintain its monetary accommodation for a while to enable the recovery to become entrenched.”

The Barclays report observed that transmission still has room to improve, and the RBI can play its part by holding steadfast to its commitment to maintain surplus liquidity and keep policy rates low to allow the prior cuts to percolate fully to lending and deposit rates.

“Indeed, of the 250 basis points of repo rate cuts (during the easing cycle from February 2019 till February 2021), only about 93 basis points have been transmitted to lending rates, while deposit rates are down by 145 basis points,” said Bajoria and Sodhani.

Published on April 04, 2021

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