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Saturday, September 25, 2021

Growth, inflation weighing, MPC may hold rates

On June 4, with focus firmly on the revival of the Covid-hit economy, the MPC slashed its growth projection, kept the main policy interest rate — repo rate — unchanged at 4 per cent and unleashed a host of measures to support businesses and ensure they have access to liquidity. The MPC will announce the next monetary policy on August 6.

By: ENS Economic Bureau | Mumbai |
Updated: August 2, 2021 10:19:02 am
Covid surge adding to uncertainty, RBI keeps key rate unchangedAn RBI staff study (not the central bank’s official forecast) pegged the Economic Activity Index for the June quarter GDP growth forecast at 22 per cent, slightly firmer than the MPC’s official forecast and DBS group GDP Nowcasting model. (File Photo)

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to keep key policy rates unchanged this week amid concerns over growth, inflation and the potential third Covid wave, experts said.

On June 4, with focus firmly on the revival of the Covid-hit economy, the MPC slashed its growth projection, kept the main policy interest rate — repo rate — unchanged at 4 per cent and unleashed a host of measures to support businesses and ensure they have access to liquidity. The MPC will announce the next monetary policy on August 6.

Radhika Rao, economist, DBS Group Research, said, “The RBI monetary policy committee will adopt a wait-and-watch mode. Policy commentary is likely to draw confidence from the turnaround in recent data but express caution over a potential third Covid wave.” While an upward revision in forecasts is possible to demonstrate inflation concerns, the market is keenly watching for guidance on liquidity withdrawal, Rao said.

“We believe that the RBI will continue to keep rates on hold and retain its accommodative stance in the upcoming policy review, as growth concerns dominate even as discussions around inflation are expected to gain prominence,” Morgan Stanley said in a report. “The growth trend is improving as indicated by the incoming high frequency data and we expect growth to turn positive on a two-year CAGR basis from quantitative easing in September,” it said.

With an easing of supply and distribution disruptions and monsoon gathering pace, headline retail inflation (CPI) is expected to moderate in the coming months. As such, the outlook for headline CPI print remains range bound, even as core inflation is expected to remain sticky, with risks stemming from higher global commodity prices. “We expect the RBI to continue with its measures to
support the liquidity and financial framework and manage the yield curve,” Morgan Stanley said.

“Additionally, we will remain watchful of any measures that influence short-term rates (such as conducting longer-term variable reverse repos), currently tracking at the lower end of the policy rate corridor,” it said.

“Hastened vaccination rollout, a turnaround in activity indicators, and buoyant agricultural output (if monsoon catches up) are reasons to remain upbeat. However, a slower improvement in aggregate demand and lagged reopening of services sector activity tempered optimism,” Rao said.

Analysts said risks of a third pandemic wave and its impact also cloud the horizon. An RBI staff study (not the central bank’s official forecast) pegged the Economic Activity Index for the June quarter GDP growth forecast at 22 per cent, slightly firmer than the MPC’s official forecast and DBS group GDP Nowcasting model. The firmer EAI is unlikely to lead to any reassessment in the annual estimates for FY22 growth, which was last adjusted down by 100 bps in June to 9.5 per cent.

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