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Reserve Bank of India (Mint )
Reserve Bank of India (Mint )

RBI Policy: MPC may pause on rates as inflation continues to be high

  • Seven out of ten bankers and economists polled by Mint said that they expect MPC to pause as inflation is likely to remain near the upper end of the RBI’s inflation mandate of 4% plus or minus 2% till September.

MUMBAI: The Reserve of India’s Monetary Policy Committee may keep policy rates unchanged on 6 August owing to rising uncertainty over inflation outlook, according to a Mint survey of bankers and economists. However, there is a small expectation of a 25 basis points cut in reverse repo as the MPC looks to push banks to pass on the rate cut instead of keeping money at the reverse repo window.

Seven out of ten bankers and economists polled by Mint said that they expect MPC to pause as inflation is likely to remain near the upper end of the RBI’s inflation mandate of 4% plus or minus 2% till September.

“There is a significant likelihood of MPC members voting for a pause during the forthcoming review. Extent of frontloaded easing already carried out and lingering immediate uncertainty about inflation trajectory for next couple of months may weigh the rate decision," said Mandar Pitale, Treasury head, SBM Bank India. "The upside inflation surprise suggests that headline inflation is likely to remain near the upper end of the RBI’s inflation mandate of 4% plus or minus 2 till September,"

Four respondents expect a 25 basis points cut in repo rate as they believe that RBI could front load the rate cut to enhance better transmission. These respondents believe that RBI could look through the temporary spike in inflation being driven by covid-19-related supply disruption.

“To prepare the ground for cheaper lending costs in 6-12 months, we believe it is better to move now, rather than wait. By several metrics, India’s monetary transmission has become slower at the margin, even though new loans are being priced by reference to an external benchmark. RBI should ease monetary policy now, if it is to factor in lowering lending rates in 12- 18 months. We believe RBI will ease policy by cutting both the repo and reverse repo rates at least 25bp to 3.75% and 3.10%, respective," said Rahul Bajoria, chief economist, Barclays Bank.

With the 115 bps reduction in repo beginning February, banks have already transmitted 72 bps to customers on fresh loans.

However, majority of respondents expect a 50 basis points rate cut before the end of the fiscal year.

“RBI will be erring on growth aide and will look at rate cut as a measured objective. That could in the range anywhere between 50-75 bps, said V Lakshmanan, treasury head, Federal bank.

In the May policy, RBI had announced a 40 basis points (bps) cut in repo and reverse rates, pivoting the RBI's focus from inflation control to fostering growth impulses. The shift in focus to growth was prompted by the MPC’s concerns over the severity of the macroeconomic impact of pandemic.

In previous policy, the MPC also refrained from providing a guidance on gross domestic product (GDP) growth for fiscal 2021, or the likely trajectory for inflation. Governor Shaktikanta Das had said, “Given all these uncertainties, GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from H2:2020-21 onwards."

On inflation, MPC was of the view that headline inflation may remain firm in the first half of FY21 but should ease in the second half aided by favourable base effect. By Q3 and Q4 of the current fiscal, the MPC expects headline inflation to fall below the target of 4%. Thus, the forward guidance of the MPC is directional rather than in terms of levels. Going forward as and when more data are available, it should be possible to estimate the path of inflation with greater certainty," Das had said in the previous policy.

The respondents therefore expect RBI to refrain from giving any projections on growth and inflation this time as well. However, they expect consumer price inflation to move significantly towards the 4% level by December this year led by food. Headline inflation has been elevated in the past few months with June data crossing the RBI’s 6% mark. However, the market is not ruling out further risk to inflation outlook arising from possibility of fresh restrictions.

Some of the respondents also expect RBI to announce a one-time restructuring package and provide some comfort on the liquidity side with an increase in held-to-maturity limits for SLR holdings of banks.

“Yield curve has steepened at the longer end due to increased risk aversion and the concern over a likely increase in Govt market borrowings. RBI will try to give comfort on liquidity creation to support the large supply of dated Govt securities. It may come out with the measures like one time loan restructuring to give a boost to lending and end the moratorium," said Rupa Nitsure, chief economist, L&T Finance.

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