Home / Industry / Banking /  MPC expected to hold policy rates in August meeting, says DBS' Radhika Rao

MUMBAI: The monetary policy committee (MPC) of the central bank is unlikely to change policy rates in August, opting to keep the repo rate at 4% and the policy corridor unchanged, said Radhika Rao, senior economist at DBS.

Forward guidance will favour a continuation of the accommodative policy stance to guard against growth risks, especially the third covid-19 wave. The accompanying commentary will heed inflation risks through close monitoring and refrain from tweaking the policy levers, for now, Rao said in a note on Friday.

“The preference to gradually draw out excess liquidity might increase the sizes of variable reverse repo rate auctions while reaffirming support for the ongoing G-SAP program. The impact of a variable rate reverse repo (VRRR) increase might be marginal given the scale of surplus liquidity estimated at 7.5-8 trillion in bank liquidity plus government cash balances," said Rao.

Nonetheless, it affirms the central bank’s intent to mop up liquidity at a calibrated pace before setting the stage for a reverse repo increase and change in policy stance around the end of 2021 or early 2022.

According to Rao, global factors might find a mention but are unlikely to be catalysts for domestic price action. At the recent FOMC, US Fed Chair Powell indicated that officials had taken a “deep dive" on how to go about scaling back bond buying but no concrete decision has been made. This comes just as market watchers weigh the impact of the current US covid-19 wave on US economic growth.

The central bank’s rate-setting committee will meet from 4-6 August. Rao said that since the last rate review in June, policymakers have had two months of inflation prints on hand and a host of high-frequency indicators that signal that the economic momentum has largely recovered from the slump caused by the second wave of the pandemic.

“The latest monthly Reserve Bank of India (RBI) bulletin reflects this confidence yet flags few risks. Hastened vaccination rollout, a turnaround in activity indicators, and buoyant agricultural output (if monsoon catches up) are reasons to remain upbeat," she said.

However, a slower improvement in aggregate demand and lagged reopening of services sector activity tempered optimism. That apart, risks of a third pandemic wave and its impact also cloud the horizon, she added.

“Watch the tone on inflation after CPI inflation held firm at 6.3% y-o-y for a second month in June. Notwithstanding these elevated prints, RBI governor Shaktikanta Das had recently emphasized that inflation was still largely supply-driven, referring to it as a temporary hump and expecting it to moderate by late-2021," said Rao.

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