RBI's MPC begins discussions; repo rate likely to remain unchanged

The Reserve Bank of India's (RBI) rate-setting panel, Monetary Policy Committee (MPC), began its three-day discussions on Wednesday amid expectations of a status quo on key interest rates, primarily owing to incertitude over the impact of the second wave of the COVID-19 pandemic.

Furthermore, the fears of firming inflation are also likely to abstain the MPC from fiddling with the interest rate in its bi-monthly monetary policy result, to be announced on June 4. The central bank kept benchmark rates unchanged at the last MPC meeting held in the month of April.

The repo rate was kept at 4% while the reverse repo rate was retained at 3.35%. M Govinda Rao, Chief Economic Advisor, Brickwork Ratings, told PTI that better-than-expected GDP numbers provide much-needed comfort to the MPC on the growth outlook.

Also Read: RBI likely to retain benchmark interest rate at existing levels: Experts

However, with the imposition of partial lockdown-like restrictions to contain the virus spread in several parts of the country, the downside risk on growth recovery has intensified, he said.

"Hence, the RBI is likely to continue with its accommodative monetary policy stance. Considering the risk of inflation emanating from the rising commodity prices and input costs, Brickwork Ratings expects the RBI MPC to adopt a cautious approach and hold the repo rate at 4%," Rao noted.

Dhruv Agarwala, Group CEO, Housing.com, Makaan.com, and Proptiger.com believes the RBI can maintain its accommodative stance in light of the economic impact of the second wave of COVID-19, without endangering its key goal of keeping inflation under control.

Reviving growth has become an important objective due to the economic damage caused by the recent lockdowns, he said, adding that the RBI should also consider providing more liquidity to the National Housing Bank to enable the stability of housing finance companies, which in turn will allow the real estate sector to expand.

Shanti Ekambaram, Group President - Consumer Banking, Kotak Mahindra Bank is of the view that in the current environment, the choices before the MPC may be limited.

"With the second phase of the pandemic impacting consumption and growth, the MPC will likely maintain status quo on policy rates, continue with an accommodative policy stance and ensure adequate liquidity in the system - all in an effort to stimulate growth. While it will keep one eye on inflation levels on the back of rising global commodity prices, it currently will focus on supporting economic growth," Ekambaram told the news agency.

According to Sandeep Bagla, CEO of TRUST AMC, "It is expected to be a no change policy, with continued economy friendly soft interest rate bias."

Also Read: RBI to maintain status quo in first MPC meet of FY22 amid COVID surge

The RBI annual report released last week, has already made it clear that "the conduct of monetary policy in 2021-22, would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth until it gains traction on a durable basis while ensuring inflation remains within the target."

The central bank, the report added, would ensure that system-level liquidity remains comfortable during 2021-22 in alignment with the stance of monetary policy, and monetary transmission continues unimpeded while maintaining financial stability.

In the assessment of the RBI, the evolving 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 progression of the southwest monsoon in 2021.

The government has retained the inflation target at 4% with the lower and the upper tolerance band of 2% and 6%, respectively, for the next five years (April 2021 - March 2026).

Retail inflation, based on the Consumer Price Index (CPI), slipped to a three-month low of 4.29% in April, mainly on account of easing prices of kitchen items like vegetables and cereals. The central bank mainly factors in the CPI while arriving at its monetary policy.

As per the RBI annual report, supply-demand imbalances may continue to exert pressure on food items like pulses and edible oils, and prices of cereals may soften with bumper foodgrain production in 2020-21.