The MPC has held repo rate rock-steady at 4% since May 2020
The rate-setting monetary policy committee (MPC) is likely to stand pat on the repo rate, in view of sticky inflation and dimming growth prospects amid the second wave of the pandemic.
Though retail inflation eased to 4.29 per cent in April from 5.52 per cent in March, the surge in wholesale inflation to 10.5 per cent in April from 7.39 per cent in March is expected to engage the committee members’ attention as it could spill over to the retail side.
The MPC will have to walk a tight rope; on the one hand it wants to rein-in inflation, on the other, it wants to support growth. Hence, MPC members may vote to keep the repo rate unchanged as well as continue with the accommodative policy stance.
“In the upcoming June 4 policy meeting, the RBI may want to sit tight in view of the high pandemic cases.
“We think the one change it might make is a markdown in the FY22 GDP growth forecast,” said Pranjul Bhandari, Chief Economist, India, HSBC Securities and Capital Markets (India) Private Ltd; Aayushi Chaudhary, economist; and Priya Mehrishi, associate, in a report.
They observed that starting in Q4 (October-December) 2021, when the proportion of population vaccinated reaches critical mass, the RBI may start lowering surplus liquidity, raising the reverse repo rate, and change its stance to neutral.
“Having said that, an increase in the 4 per cent benchmark repo rate can wait for longer in our view,” said the economists.
The policy repo rate was last reduced from 4.40 per cent to 4.0 per cent on May 22, 2020.
“We believe that the Monetary Policy Committee has no option but to stay accommodative, even as it monitors incipient price pressures and keep all rates on hold, while likely extending its Government Securities Acquisition Program (GSAP),” said Rahul Bajoria, Chief India Economist, Barclays Securities (India) Pvt Ltd, and Shreya Sodhani, Research Analyst, Barclays Investment Bank, Singapore, in a note.
They emphasised that since May’s policy announcements, the growth outlook has degraded further, with greater evidence that inflation headwinds may remain persistent going into H2 (July-December) 2021.
However, with some relief on the virus caseloads, the RBI can balance its message around prospects for a return to economic normality.
In its Annual Report, the RBI observed that looking ahead, the evolving retail/ CPI inflation trajectory is likely to be subjected to both upside and downside pressures. The food inflation path will critically depend on the temporal and spatial progress of the south-west monsoon in 2021.
“Second, some respite from the incidence of domestic taxes on petroleum products through coordinated action by the Centre and States could provide relief, although international crude oil prices continued to be volatile.
“Third, a combination of high international commodity prices and logistic costs may push up input price pressures across manufacturing and services,” said the report.