Faced with the dilemma of a slump in growth and high retail inflation, the Reserve Bank of India (RBI) is likely to keep the policy repo rate unchanged at 5.15 per cent and also continue with its accommodative monetary policy stance in the last bi-monthly policy review of FY2020, which is scheduled to be announced on Thursday. The central bank had kept the policy repo rate (the interest rate at which the RBI provides liquidity to banks to overcome short-term liquidity mismatches) in the previous (fifth) bi-monthly policy review.
Since the beginning of the current financial year, the repo rate has been cut four times, aggregating 110 basis points, to prop up the faltering growth. One basis point is equal to one-hundredth of a percentage point.
“Since the last monetary policy, contrary factors are at play. Economic growth has been estimated to be the lowest in the past seven years, while retail inflation has surpassed RBI’s upper band of inflation targeting at 6 per cent.
“We believe that policy rates should remain unchanged given the rising retail inflationary concerns mainly on account of food inflation. However, given the economic growth concerns ,the RBI is likely to retain the monetary policy stance at ‘accommodative’,” said Rucha Ranadive, Economist, and Madan Sabnavis, Chief Economist, CARE Ratings, in a report.
After remaining in a benign phase for quite a long period, the December 2019 inflation reached a five-year high at 7.35 per cent. India’s gross domestic product (GDP) growth for the second quarter slumped to 4.5 per cent in the second quarter against 5 per cent in the first quarter.
M Govinda Rao, Chief Economic Advisor, Brickwork Ratings, said, “The Monetary Policy Committee (MPC), no doubt, faces a serious dilemma with its commitment to control inflation and manage growth. The slump in real GDP growth warrants accommodative monetary policy actions and stance, whereas the upturn in headline inflation for the fifth consecutive month calls for a cautious response, or at least to maintain status quo at this juncture.”
Rao observed that despite the fiscal slippage and mounting inflationary pressures, the MPC cannot undertake monetary tightening in the current cycle, given the weak growth scenario. He added that the inflation rate has already exceeded the MPC’s upper bound target (6 per cent), and going by the MPC’s monetary policy framework, there is little room to continue with the accommodative monetary policy stance as well.
Brickwork Ratings, in a note, said it expects the MPC to continue with the accommodative policy stance for now, as the slump in real GDP growth warrants it.
Shanti Ekambaram, President – Consumer Banking, Kotak Mahindra Bank, said, “From a macroeconomic perspective, growth continues to be a challenge. GDP for FY20 is likely to be around 4.8-5 per cent and it is estimated that FY21 is likely to see growth in the 5.5 to 6 per cent range.
"Recent high frequency indicators show some green shoots, including IIP (index of industrial production) numbers for January. However, (we) need to see how the growth trajectory pans out.”
Ekambaram underscored that the Union Budget has estimated a higher fiscal deficit of 3.8 per cent for this year and a glide path to 3.5 per cent (for FY21). She assessed that inflation is likely to trend at a level higher than RBI’s 4 to 4.5 per cent target this quarter.
“Against this backdrop, the RBI is likely to maintain status quo on rates as well as its monetary policy stance. They are likely to continue an accommodative stance to support growth,” Ekambaram said.