RBI panel must tackle growth and inflation

The Monetary Policy Committee (MPC) of the Reserve Bank of India is expected to keep its policy stance accommodative when it announces the decisions of the panel on Thursday. The MPC, meeting for the last time before the expiry of its four-year term, is mandated to strike a balance between growth and inflation, which stood at 6.09% in June.

While most bankers and economists expect the MPC to keep the rates unchanged, preferring to keep its powder dry for future interventions, a surprise cut could indicate that the worst may not be over as far the economy is concerned.

A Mint survey had shown that six out of 10 bankers expect RBI to keep the repo rate on hold at 4%, while the rest expect a 25 basis point cut. A Bloomberg poll of 44 economists showed that economists were divided almost right down the middle; with 22 expecting a 25 basis point cut, one projecting a 50-point move and 20 predicting a pause.

Many who are expecting a pause also believe the space for further rate cuts is limited as RBI is near the end of the current rate-cutting cycle. They believe it would be prudent for RBI to act in the October meeting once it has greater clarity on both growth and inflation. A majority of the respondents polled by Mint, however, expect RBI to do a total of 50 basis points rate cut before the end of the financial year.

Since the last surprise MPC meeting in June, growth outlook has worsened and inflationary pressures have mounted. The finance minister on Tuesday said the prospect of economic recovery has remained “fragile” because of a surge in covid-19 cases and frequent lockdowns.

Retail inflation jumped from 5.8% in March to 7.2% in April and then eased to 6.1% in June as the nationwide lockdown was lifted. While inflation is expected to spike in July, it is expected to ease in the second half of the fiscal.

According to Abheek Barua, chief economist at HDFC Bank, while inflation is expected to slow to 4.5% in the second half of the fiscal year, RBI could be worried about the negative real interest rate.