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The respondents expect the RBI to refrain from giving any projections on growth and inflation this time. (Mint )
The respondents expect the RBI to refrain from giving any projections on growth and inflation this time. (Mint )

MPC unlikely to cut rates due to inflation concerns

  • Six out of 10 bankers and economists surveyed said they expect the RBI to hit pause
  • In the previous policy review in May, RBI had announced a 40 bps cut in repo and reverse rates

MUMBAI : The Reserve Bank of India’s Monetary Policy Committee may keep policy rates unchanged on 6 August due to rising uncertainty over the inflation outlook, shows a Mint survey of bankers and economists. However, there is a possibility of a 25 basis point 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.

Six out of 10 bankers and economists polled by Mint said they expect the MPC to pause, as inflation is likely to remain near the upper end of the RBI’s mandate.

“There is a significant likelihood of MPC members voting for a pause during the review. The extent of front-loaded easing already carried out and lingering immediate uncertainty about the inflation trajectory for the next couple of months may weigh on the rate decision. 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," said Mandar Pitale, treasury head, SBM Bank (India) Ltd.

However, four respondents expect a 25 bps cut in the repo rate as, they said, the RBI could front-load the rate cut to enhance better transmission. The respondents added that the RBI could look through the temporary spike in inflation as 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 by at least 25 bps to 3.75% and 3.10%, respectively," said Rahul Bajoria, chief economist, Barclays Bank.

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

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

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

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

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

The MPC was also of the view that headline inflation may remain firm in the first half of FY21, but should ease in the second half, aided by a favourable base effect. By Q3 and Q4 of FY21, it 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 is available, it should be possible to estimate the path of inflation with greater certainty," Das had said.

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

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