Active Stocks
Sat May 18 2024 12:49:03
  1. Tata Motors share price
  2. 952.95 0.76%
  1. Power Grid Corporation Of India share price
  2. 316.85 1.12%
  1. Tata Steel share price
  2. 167.90 0.39%
  1. ITC share price
  2. 436.50 -0.02%
  1. State Bank Of India share price
  2. 821.30 0.42%
Business News/ News / India/  Recovering growth, rising inflation put rates on hold

Recovering growth, rising inflation put rates on hold

Repo rate stays unchanged at 4% as expected; MPC raises growth and inflation expectations

RBI's monetary policy committee kept the repo rate unchanged at 4% (MINT_PRINT)Premium
RBI's monetary policy committee kept the repo rate unchanged at 4% (MINT_PRINT)

The Reserve Bank of India on Friday pledged to retain an accommodative policy stance well into the next financial year to support a nascent economic recovery.

The central bank’s monetary policy committee (MPC), however, kept the repo rate unchanged at 4%.

The committee raised its growth and inflation expectations, in a clear indication that it won’t change its benchmark interest rate soon.

Inflationary pressures are emanating from supply-chain disruptions and higher indirect taxes
View Full Image
Inflationary pressures are emanating from supply-chain disruptions and higher indirect taxes

“The MPC decided to continue with the accommodative stance as long as necessary—at least during the current financial year and into the next financial year—to revive growth on a durable basis and mitigate the impact of covid-19 on the economy, while ensuring that inflation remains within the target going forward," RBI governor Shaktikanta Das said in the monetary policy statement.

The panel, which cut rates by 115 basis points since the covid-19 outbreak in March, has kept rates on hold since May.

“We think the RBI may choose to maintain this position until it sees the drivers of growth become broad-based. We also think inflation is a secondary concern in the RBI’s view, given weak aggregate demand conditions," said Rahul Bajoria, chief economist of Barclays Bank in India.

Acknowledging the faster-than-anticipated rebound in economic activity in the second quarter, the RBI said it now expects the economy to shrink by 7.5% in the year to 31 March. It had earlier projected a 9.5% contraction.

The monetary policy panel, however, noted that growth is spread unevenly and continues to be dependent on monetary and fiscal support.

Private investment continues to remain anaemic, and capacity utilization is yet to pick up fully.

The outlook is therefore contingent on the extent of covid-19 containment, the MPC said.

“We must turn our attention to nurturing the recovery beyond the meeting of pent-up demand, and focus on setting it on a firm trajectory of sustained, high-quality growth," said Das.

The committee also noted that inflation is expected to remain elevated in the short term, despite some easing in the price of fruits and vegetables.

Inflationary pressures are emanating from supply-chain disruptions and higher indirect taxes.

The RBI has therefore raised its inflation forecast to 6.8% in the third quarter, 5.8% in the fourth and 4.6-5.2% in the first half of the next financial year.

The central bank’s earlier inflationary estimate stood at 5.4-4.5% in the second half of the current fiscal year and 4.3% for the first quarter of the next fiscal year.

Given the inflationary pressures in the Indian economy, analysts are ruling out any more rate cuts in the current fiscal year.

“In our view, the adverse outlook for inflation, the concern that price pressures are spreading, and the strong commentary around monitoring threats to price stability to anchor macroeconomic and financial stability indicate that the room for further rate cuts is negligible," said Aditi Nayar, principal economist, ICRA Ltd.

“However, an extended pause will mean that rates will remain low for a long period of time," Nayar added.

Any significant development will happen only in the next fiscal year, said Shubhada Rao, founder of QuantEco Research.

“If growth picks up or inflation sticks on, the monetary policy committee may want to recalibrate its strategy. But to gather a complete picture, RBI would perhaps wait for the Union Budget and also the government’s view on the inflation-targeting framework by the end of March," she said.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed - it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 04 Dec 2020, 11:53 PM IST
Next Story footLogo
Recommended For You