RBI likely to retain benchmark interest rate on Friday, feel experts

Amid apprehensions over inflation and continued uncertainty with regard to the second wave of the COVID-19 pandemic, the Reserve Bank of India (RBI) is likely to retain the benchmark interest rate at the existing levels at its upcoming monetary policy review, feel experts.

The next bi-monthly monetary policy review is scheduled to be announced on June 4, following the meeting of the Monetary Policy Committee (MPC) beginning Wednesday. The meeting of RBI Governor Shaktikanta Das-headed rate setting panel is scheduled for June 2 to 4.

The RBI had kept key interest rates unchanged after the last the MPC meeting held in April. The key lending rate, the repo rate, was kept at 4 per cent and the reverse repo rate or the central bank's borrowing rate at 3.35 per cent.

The RBI's 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 till it gains traction on a durable basis while ensuring that inflation remains within the target".

The central bank, the report added, would ensure that system-level liquidity remains comfortable during 2021-22 is 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 progress of the south-west monsoon in 2021.

"The heightened risk of inflation, owing to the higher input costs and petroleum prices, will constrain the MPC in taking any rate-related action.

"We are in for a long pause with open market operations as a tool that will be employed more frequently towards keeping the 10-year yields close to six per cent," said PwC India Leader (Economic Advisory Services) Ranen Banerjee.

Expressing a similar opinion, ICRA Chief Economist Aditi Nayar said that with the economic outlook remaining uncertain in light of the continuing pandemic, "we expect the monetary policy stance to remain accommodative for a large part of 2021, until the vaccine coverage improves dramatically".

"We estimate the average CPI (Consumer Price Index) inflation to moderate to 5.2 per cent in 2021-22 from 6.2 per cent in 2020-21," she said.

Nayar added that nevertheless, it will remain well above the mid-point of the MPC's renewed medium-term target range of 2-6 per cent, ruling out the possibility of further rate cuts to support economic activity and sentiment.

The government has retained the inflation target at four per cent with the lower and the upper tolerance band of two per cent and six per cent, respectively, for the next five years (April 2021-March 2026).

Moneyboxx Finance Finance Controller Viral Sheth said that given the rising risk of inflation, "we expect status quo as far as policy rates are concerned in the upcoming monetary policy".

He also stressed that it is imperative for the RBI to ensure ample credit flow to the rural economy. Setting up a special window for rural-focused and smaller NBFCs will help immensely, Sheth said.

He added that alternatively, the central bank should consider enhancing or relaxing the exposure limit of banks to non-banking financial companies (NBFCs), particularly smaller ones.

Indian Bank Managing Director and CEO Padmaja Chunduru said the MPC would be tracking inflation closely.

"Given that the economy is not yet opened up fully and the uncertainty around vaccination is still continuing, I think they will still retain the interest rate where it is," Chunduru said.

When about his expectations, NAREDCO National President Niranjan Hiranandani also said the central bank is likely to maintain an accommodative stance.

"The second wave of the COVID-19 pandemic has impacted the economy; there is a need to enhance liquidity in the system, especially for stressed industries," he said.

He added that due measures to ensure banks do not get any more non-performing assets (NPAs) need to be taken up, including moves related to the Insolvency and Bankruptcy Code (IBC).

Andromeda and Apnapaisa CEO V Swaminathan said inflation is a key concern ahead of the upcoming monetary policy review.

With petrol prices touching Rs 100 per litre, the common man has been affected by this, he said. "I expect the RBI to announce more steps to give our COVID-19-battered economy some room for much-needed growth."

Retail inflation, which is based on CPI, slipped to a three-month low of 4.29 per cent in April, mainly on account of easing of prices of kitchen items like vegetables and cereals. The RBI 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, prices of cereals may soften with bumper foodgrains production in 2020-21.

If the RBI maintains status quo in the key rate, it would be the sixth time in a row that the central bank kept the policy rate unchanged. The RBI had last revised its policy rate on May 22 in an off-policy cycle to perk up demand by cutting the interest rate to a historic low.