RBI likely to keep interest rates unchanged in upcoming policy review

The Reserve Bank is likely to keep interest rates unchanged in the forthcoming bimonthly monetary policy review in view of the rising retail inflation driven mainly by supply side issues, experts say.

RBI Governor Shaktikanta Das had earlier said although there was headroom for further monetary policy action, it was important to keep “our arsenal dry and use it judiciously.” The six-member Monetary Policy Committee (MPC) headed by RBI Governor is scheduled to meet for three days starting September 29. The resolution of the MPC would be announced on October 1.

In its last MPC meeting in August, RBI kept policy rates unchanged to help tame inflation that in recent times had surged past 6 per cent mark, and said the economy is in an extremely weak condition following the pandemic. The RBI has cut policy rates by 115 basis points since February.

As regards the next policy review, industry body Confederation of India Industry said: “The RBI should maintain its accommodative stance, while avoiding a rate cut for now given the stickiness in CPI inflation. While supporting growth is critical, the RBI could wait till there is some visible moderation in inflation.” Expressing similar opinion, Assocham Secretary General Deepak Sood said the Reserve Bank should continue in a more pronounced way the accommodative stance on the policy interest rates in the wake of serious challenges due to contraction in the economy induced by the COVID-19 pandemic.

Union Bank MD and CEO Rajkiran Rai G feels it's going to be status quo. "With so much of high inflation, I don't think they will cut rate this time".

There is a scope for a rate cut but that will happen around February, he added.

"The food inflation is likely to ease in December and post that due to the good crops and, so, the opportunity may come around February for rate cut," he said.

Retail inflation softened slightly to 6.69 per cent in August from 6.73 per cent in July.

The government has mandated RBI to keep inflation at 4 per cent (+/- 2 per cent).

Aditi Nayar, Principal Economist, ICRA said inflation is expected to harden further in September and ease gradually over the next few months, led by a base effect driven softening in food inflation.

"However, the core inflation is expected to remain stubbornly sticky around current levels. Accordingly, we anticipate an extended pause from the MPC, despite the recession that is currently underway," she said.

Care Ratings chief economist Madan Sabnavis too was of the view that it will be a status quo and there will be no change in the stance, repo rate or CRR.

"I think there has been more of a case of wait and watch because you have seen that inflation has been high,” Sabnavis said.

On the other hand, Anuj Puri, Chairman, ANAROCK Property Consultants said the choice between reducing or retaining policy rates is definitely a dilemma for MPC this week.

He said India's economy will probably contract substantially this year due to the pandemic, so there are obviously expectations for a reduction in repo rate.

"With real estate demand gradually reviving, especially in the wake of reduced stamp duty charges (in Maharashtra) and developer discounts and freebies, lower repo rates may be the nudge the sector needs to further boost property buyer activity in the upcoming festive season," Puri opined.

Mayur Modi, Co-founder and Co-CEO, Moneyboxx Finance, an NBFC catering to small MSMEs, said considering the liquidity position in the system he does not expect RBI to make further changes in policy rates, but RBI can use the upcoming review meeting as an opportunity to implement previous announcements in a better way.

"RBI should extend or make sure that the benefits of its partial guarantee scheme and other liquidity measures are available to smaller unrated NBFCs as well," Modi said.

Brickwork Ratings too expects RBI to hold repo rate at 4 per cent in the upcoming MPC meeting.

"With the current level of inflation and prevailing uncertainty over the growth outlook, BWR expects the RBI MPC 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," it said in a statement.

Shanti Ekambaram, Group President, Consumer Banking, Kotak Mahindra Bank also said there may be no change in the repo and reverse repo rates with RBI keeping a close eye on key macroeconomic data. MPC's stance will continue to be accommodative and supportive of economic growth.

"This is crucial as we are now in a critical phase of India's recovery - high frequency data shows that many segments of the economy are moving and are reaching close to 70/80 per cent of pre-Covid-19 levels," Ekambaram said.

As per the Reserve Bank of India Act, 1934, the central bank is required to organise at least four meetings of MPC in a year. The September 29-October 1 MPC would be the 25th meeting of the rate setting panel.