MPC meet: RBI may keep interest rates unchanged over inflation concerns

The Reserve Bank of India (RBI) may keep key policy rates unchanged and reiterate 'accommodative' stance in the upcoming monetary policy review, primarily due to consistently high inflation for nine straight months now. The RBI's Monetary Policy Committee will start its three days meet on December 4.

It is expected that the apex bank will take steps to fasten India's economic recovery after the coronavirus, but high inflation will most likely force it to keep the rates unchanged. Notably, inflation has overshot the RBI's tolerance level of 6 per cent for nine months now.

While the economy contracted for the second successive quarter, declining 7.5 per cent year-on-year, there was something to cheer about. The GDP grew at 23.2 per cent sequentially signalling a gradual rebound in the economy after 24% contraction in the quarter ending June. It also remains the best quarter-on-quarter growth since 1996 when the country started giving out quarterly numbers. The current GDP numbers are even better than the ones based on the RBI's recent "nowcast" model.

Also read: Q2 GDP growth shows surprising resilience: Is worst over for Indian economy?

Despite that, economists are likely to be wary as coronavirus is causing trouble in major parts of the country, with metro cities seeing another wave of COVID-19 cases.

In its previous economic policy, the RBI had predicted the Indian economy could shrink 9.5 per cent in the current fiscal year. Amid all this, inflation has remained a cause of concern for the central bank.

Retail inflation, calculated based on Consumer Price Index (CPI), rose for the ninth month in a row in October, reaching 7.61 per cent on the back of increasing food prices. It is the highest level of retail inflation since May 2014 when the inflation level was at 8.33 per cent.

The RBI had earlier projected the CPI-based inflation at 6.8 per cent for Q2 and 5.4-4.5 per cent for H2 of FY21. Experts believe the central bank could revise its forecast now.

With the rate cuts unlikely, the RBI has infused liquidity into the system via targeted long-term repo operations, under which banks have been able to borrow up to Rs 1 lakh crore and invest in bonds in companies. The size of OMO -- under which the RBI buys and sells bonds -- was also increased to Rs 20,000. It resulted in the pumping of additional liquidity into the system and decline in interest rates.

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