Business Desk, ETV Bharat: The Reserve Bank of India’s (RBI’s) monetary policy committee is being widely expected to keep the benchmark interest rate on hold when it announces the outcome of the sixth bi-monthly meeting on 4 December.
The country’s leading economists believe that elevated inflation in the past couple of months may restrict the MPC from cutting rates further even as concerns persist on a sustainable economic recovery and a resurgence in coronavirus cases in the country.
“The stance that should be adopted by RBI’s upcoming policy meet should be of pause or status quo,” said Dr. Pooja Misra, Area Head, Economics, at the Birla Institute of Management Technology.
“Investment demand is still not back and the government and RBI need to spur investment demand, thus adequate liquidity should be available in the financial flow of the economy thereby enabling the industry to be able to borrow at reasonable rates,” Misra added.
She also sounded a note of caution on the growth outlook, warning about dwindling consumption demand in the economy.
“Even though growth numbers show a recovery in Q2 and there is positive news around timelines for the vaccine, one still needs to look at demand numbers post the festival season. With labour costs being cut in Q2, this can also negatively impact demand in the economy,” said Misra.
Notably, GDP numbers for the September quarter showed that the economy contracted 7.5% during the period, which was better than the RBI’s earlier forecast of 9.8% contraction for the quarter and also the 23.9% contraction seen during the first quarter of the fiscal year. Meanwhile, consumer price inflation in October stood at 7.61%, higher than RBI’s inflation target of 4% (+/- 2%).
Dr. Rucha Ranadive, economist at CARE Ratings Ltd, also expected RBI to retain the policy rate at 4% and continue with the accommodative policy stance despite build-up in the inflationary pressures in order to address growth concerns.
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“The Indian economy has slipped into technical recession with two successive quarters of contractions. However, the mounting inflation, which has surpassed the RBI’s upper tolerance level of the inflation targeting (6%) for the past seven months, will be the guiding factor for a status quo in this policy,” said Ranadive.
Ranadive in fact ruled out chances of any further rate cut in the current fiscal if inflation continues to stay high.
“If the inflation does not cool-off below 6% for the rest of the months, we do not foresee a rate cut in this fiscal year, though the accommodative stance would continue,” she said.
Ranadive also said that any cut in the cash reserve ratio (CRR) -- the percentage of cash required to be kept in reserves by banks vis-a-vis their total deposits – is ruled out as the banking system continues to be flush with liquidity along with tepid credit offtake.
Madhavi Arora, lead economist at Emkay Global, also said that liquidity surplus might be RBI’s key concern this time.
“With inflation remaining way above the comfort zone of policymakers, the possibility of further conventional rate cut is dimming. The market focus now will be on how the RBI manages the liquidity conundrums amid high inflation and persistent appreciation pressures on the rupee,” said Arora.
To recall, in the last MPC meeting in October, RBI had kept policy rates unchanged and projected the country's GDP to contract 9.5% in the current financial year. The central bank has cut policy rates by 115 basis points since February this year.
