The revamped Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which is scheduled to meet this week, is likely to keep the main policy instrument — repo rate, or the rate at which the RBI lends funds to banks — unchanged at 4 per cent on Friday, as retail inflation has been above the upper band of the RBI’s inflation target of 6 per cent for five consecutive months.
After a delay of over a week, the government on Monday appointed Shashanka Bhide, Ashima Goyal and Jayanth R Varma as independent members to the six-member MPC of the RBI. Bhide is currently a senior advisor at the National Council for Applied Economic Research, while Goyal is a professor at the Indira Gandhi Institute of Development Research in Mumbai. Varma, who was earlier a whole-time member of Sebi, is currently a professor at IIM, Ahmedabad. The revamped MPC will meet on October 7, 8 and 9 to finalise the monetary policy, the RBI said on Tuesday.
The central bank was forced to postpone the bi-monthly meeting of the MPC scheduled for September 29, 30 and October 1 as the government failed to nominate its three members to the six-member panel. MPC is the statutory committee that fixes the key policy interest rate and monetary policy stance of the country as well as the inflation target. The tenure of the three members appointed by the government in 2016 expired after the previous policy on August 6, when the repo rate was kept steady at 4 per cent.
With Covid-19 dealing a crippling blow to the economy and an already weak financial sector reeling, India is screaming out for easier monetary policy. “However, India is suffering from rising prices, leaving it in a stagflationary grip. The RBI will likely have no choice but to leave rates unchanged to defend the currency. A surprise cut should be immediately negative for the Indian rupee,” said Jeffrey Halley, senior market analyst, Asia Pacific, OANDA.
Uncertainty over growth to be key
With the current level of inflation and prevailing uncertainty over the growth outlook, the RBI MPC is expected to adopt a wait-and-watch approach and hold the repo rate at 4 per cent, and continue with its accommodative monetary policy stance in its October meeting.
According to Care Ratings, there would be a status quo in this monetary policy but given the concerns around economic growth, the RBI is likely to retain the monetary policy stance at “accommodative”. The RBI is likely to ensure surplus liquidity in the banking system primarily via open market operations and special OMOs with a dual objective of improving financial conditions and managing the yield curve, it said.
With the current level of inflation and prevailing uncertainty over the growth outlook, the RBI MPC is expected to adopt a wait-and-watch approach and hold the repo rate at 4 per cent, and continue with its accommodative monetary policy stance in its October meeting, Brickwork Ratings said in a report.
If there is no consensus on the rate or policy in the MPC meeting, there will be a voting process. MPC members differed on a couple of occasions on the quantum of Repo rate changes but eventually went by majority decision. Though the MPC slashed the key policy rate — repo rate – by 250 basis points to 4 per cent, the rate cut transmission has been rather slow with banks taking their own sweet time to pass on the benefits.
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