The latest government data showed that the economy rebounded in the fiscal second quarter from a record 24% contraction in the preceding three months.
The latest government data showed that the economy rebounded in the fiscal second quarter from a record 24% contraction in the preceding three months.

RBI may keep policy rates unchanged

All the 10 economists expect RBI to keep the repo rate, the rate at which banks borrow from the central bank, at 4% while maintaining an accommodative policy stance.
By Gopika Gopakumar | Hindustan Times, Mumbai
PUBLISHED ON NOV 30, 2020 01:45 AM IST

The central bank is expected to keep interest rates unchanged this week, fettered by stubbornly high inflation, according to a Mint survey of 10 economists.

While the Reserve Bank of India (RBI) may continue to take steps to underpin India’s economic recovery, high inflation, which has overshot the central bank’s 6% tolerance level for seven straight months, will hamstring its ability to cut rates when the rate-setting panel meets on December 4. Retail inflation hit a six-and-a-half-year high of 7.6% in October, led by spiralling food prices.

All the 10 economists expect RBI to keep the repo rate, the rate at which banks borrow from the central bank, at 4% while maintaining an accommodative policy stance.

 

“While the risks to growth still persist, RBI has had to adopt a judicious mix of maintaining an accommodative stance, alongside holding the rates steady in recent months, as headline and core inflation indices have remained stubbornly elevated,” said Shubhada Rao, founder of QuantEco Research.

The majority of respondents now expect RBI to put rate cuts on hold for the rest of the fiscal, a departure from the earlier expectation of a rate cut before the fiscal year-end.

“We now expect RBI to stay on hold through 2021 (vs our previous forecast of a 50bps cut), as inflation has remained stubbornly high, closing the window for policy easing. At next week’s policy meeting, we expect RBI to revise up both its growth and inflation projections, but retain the dovish forward guidance,” Nomura said in a note.

The latest government data showed that the economy rebounded in the fiscal second quarter from a record 24% contraction in the preceding three months.

GDP shrank by 7.5% in the September quarter, slower than the 8.6% contraction predicted by the central bank’s “nowcast” model.

Economists are, however, cautious, with the economy remaining vulnerable to another resurgence in coronavirus infections after the festive season, although promising results from vaccine trials raise the prospect of a swifter end to the pandemic.

In its previous policy, RBI had estimated GDP to shrink 9.5% in the year to March 31.

Inflation, however, has been a nagging concern. RBI had earlier projected Consumer Price Index-based (CPI) inflation at 6.8% for the second quarter and 5.4-4.5% for the second half of fiscal year 2021. This is likely to see a revision, the economists said. “Inflation has surprised on the upside, remaining above the upper tolerance level of 6%, mainly due to supply-side factors. In light of this upside surprise, we expect RBI to revise up its inflation projection by more than 1 percentage point to 5.5-6.9% in H2 FY21 and a new H1 FY22 forecast of 4.2-4.8%,” Nomura said in the note.

With cutting rates becoming a challenge, RBI has sought to infuse liquidity. In October, it allowed on-tap targeted long-term repo operations for banks to borrow up to 1 trillion from the window and invest in bonds of companies in certain sectors. It also increased the size of open market operations, under which RBI buys and sells government securities, to 20,000 crore to keep interest rates benign. These measures resulted in a gush of liquidity and a subsequent decline in interest rates across the economy.

“Funds are easily available at competitive rates. Yet, investment confidence is low due to the uncertainty about the duration of the pandemic and the ongoing economic slowdown. I now expect RBI to come out with measures to absorb excess liquidity to reduce irrational pricing of money market instruments and protect the interest of savers,” said Rupa Rege-Nitsure, chief economist, L&T Finance.

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