Business strategy

Repo Rate, Policy Stance, Inflation, What to Expect

Reserve Bank of India (RBI) will announce the decision of its bi-monthly monetary policy on August 6. India’s central bank will likely to keep interest rates at record lows amid fears of third wave of coronavirus pandemic. RBI monetary policy committee (MPC) will keep the key lending rate or the repo rate unchanged at 4 per cent for the seventh straight meeting, said majority of the analysts.

Hardening inflation and uncertain growth amid Covid-19 pandemic will likely force the policymakers to continue on a wait-and-watch mode, said analysts. “The RBI MPC is unlikely to rock the (policy) boat in August, 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. The accompanying commentary will heed inflation risks through close monitoring and refrain from tweaking the policy levers for now,” opined Radhika Rao, senior economist at DBS Bank told.

“We also expect the RBI to remain patient with any policy maneuver till

the end of FY22 and focus more on domestic conditions of evolving growth-inflation mix. However, the minutes of this meeting may provide interesting insights into the MPC’s mind and provide a guidance to the future trajectory of monetary policy, especially as growth appears to be at an inflection point but with inflation moderating,” said YES Bank’s Economist department.

“The RBI is unlikely to announce any major changes in its upcoming monetary policy because retail and wholesale inflation are far from under control and the pandemic continues to exert further inflationary pressures,” said Anuj Puri, chairman, ANAROCK Property Consultants.

All 61 economists polled by Reuters expected the MPC to hold rates as Asia’s third largest economy grapples with various local lockdowns to control Covid-19 pandemic. However, the consensus expected the central bank to make two 25 basis point increases next fiscal year, taking the repo rate to 4.50 per cent by end-March 2023.

Economists said said that the central bank may slightly increase their inflation forecast. “A 6-0 voting in favour of status quo on rates in August with accommodative stance is our baseline expectation. Given higher global commodity prices, sticky food inflation and rise in domestic fuel prices inflation looks set to stay high for the RBI’s comfort. However, with the tentative and uneven nature of recovery, one expects the MPC to prioritise supporting growth in the coming months,” said Siddhartha Sanyal, chief economist and head of research, Bandhan Bank.

“Expect the MPC to dial up its FY22 inflation forecast from the present 5.1% y/y. Headline CPI inflation has stayed above the 4% target midpoint for 21 consecutive months and above the 6% tolerance band for more than half of that period. We expect price pressures to moderate for the rest of 2021 and bounce in the March 2022 quarter. Our CPI inflation forecast for FY22 is 5.5%,” Rao added.

“Though the consumer inflation has increased above 6 per cent in the last two months, RBI is not expected to increase the rate nor change its stance from accommodative to neutral  with the threat of third wave looming large. The additional support provided with rate cuts during the pandemic could be normalised only after analysing the impact of third wave. Even during the last one year when the CPI crossed the 6 per cent mark due to supply side pressure, the MPC did not increase rates and supported growth. In the event of CPI crossing the 6 per cent mark consistently in the next few months, MPC might be forced to reconsider the rates and stance. Till then, status quo is expected,” said  Divakar Vijayasarathy, founder and managing partner, DVS Advisors LLP.

Read all the Latest News, Breaking News and Coronavirus News here

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *