Will RBI pause on rate cuts? Find out experts' take

Though previous actions have been on expected lines in terms of the accommodative stance RBI took after economic growth took a major hit in the country following the Covid-19 outbreak, this time the analysts look quite divided on the central bank’s next possible move.

Mumbai: The monetary policy committee (MPC), headed by Reserve Bank of India (RBI) governor Shaktikanta Das, will announce its decision on policy rates on Thursday after the three-day meet ends.

Though previous actions have been on expected lines in terms of the accommodative stance RBI took after economic growth took a major hit in the country following the Covid-19 outbreak, this time the analysts look quite divided on the central bank’s next possible move.

Anagha Deodhar, economist at ICICI Securities, told ETV Bharat that RBI is likely to pause on rate cut in this monetary policy review as inflation can’t be overlooked anymore. “If you see, retail inflation has been above 6% for the past three consecutive months. Moreover, potato prices are still rising 40% year-on-year. It means it’s time for RBI to act on it,” she said.

To recall, consumer price index (CPI)-based inflation stood at 6.09% in July, 6.26% in May and 7.22% in April this year. The current monetary policy framework mandates RBI to keep consumer price inflation at 4%, with a leeway of +/- 2 percentage points (thereby allowing CPI inflation to move in a 2-6% range at most).

However, challenging macroeconomic conditions and recession fears have made RBI cut interest rates drastically by as much as 115 basis points in two off-cycle meetings of the MPC – in March and May 2020 – to prop up the economy.

Deodhar believes despite previous rate cuts, India’s GDP is likely to contract 20% year-on-year in the first quarter of FY21. “Though manufacturing is still showing signs of recovery, the country’s services sector has taken a major hit,” she said.

An SBI research report - Ecowrap also stated that an August rate cut is unlikely. “We believe that the MPC could now well debate what further unconventional policy measures could be resorted to in the current circumstances to ensure financial stability is continued to be addressed,” the report said.

Meanwhile, domestic ratings agency Crisil believes that the MPC is likely to cut rates by 25 basis points in the forthcoming monetary policy review even though inflation remains on the higher side.

“All things considered, we believe that growth concerns would still outweigh those on inflation and expect RBI to cut repo rate by 0.25 per cent in its August policy,” economists at Crisil's research wing said.

Another ratings agency ICRA also thinks that a further rate cut is on the cards. Aditi Nayar, principal economist at ICRA, told PTI: “We anticipate a further asymmetric cut of 25 basis points in the repo rate and 35 basis points in the reverse repo rate, in a split decision from the MPC.”

Explaining the reason behind the projection, Nayar said that though CPI inflation has exceeded the MPC’s target range of 2-6% in the past three months, it is expected to recede within this range by August 2020.

In its last monetary policy statement in May, RBI had announced that all members of the MPC had voted for a reduction in the policy repo rate and maintaining the accommodative stance as long as “it is necessary to revive growth and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target”.

“With the inflation outlook remaining benign as lockdown-related supply disruptions are mended, the policy space to address growth concerns needs to be used now rather than later to support the economy, even while maintaining headroom to back up the revival of activity when it takes hold,” the statement added.

(ETV Bharat Report)