RBI policy review: New MPC may opt for interest rate pause, says BS poll

Economists and bond traders are anticipating a pause in policy rates on Friday (today), expecting the monetary policy committee (MPC) of the Reserve Bank of India (RBI) to wait for more rate transmission.

All 10 economists and bond traders polled by Business Standard expect the status quo to continue on rates.

Late Monday, the government named Jayanth Varma, professor at the Indian Institute of Management, Ahmedabad; Ashima Goyal, member of the prime minister’s Economic Advisory Council; and Shashanka Bhide, senior advisor at the National Council of Applied Economic Research as external members of the MPC.

The MPC was originally scheduled to meet on September 29, September 30, and October 1, but the new members were not named then. While the new members are domain experts, at the RBI they will get to see more granular data than what is put out for the public. Therefore, economists say, they are unlikely to assert themselves in the first meeting and would like to go with a status quo policy.

Hence, economists expect the panel to rely on the monetary policy department (MPD) of the RBI. “The induction of the new MPC members is unlikely to impact any decision making at the RBI. We believe the MPC as a group with decisive inputs from the RBI is more empowered to take decisions technically and in a cogent manner. Additionally, in 2016, when new MPC members were inducted, the decisions were always unanimous in the first few meetings, indicating ultimately the regulator matters,” observed Soumyakanti Ghosh, chief economic advisor at the State Bank of India group. 

Ghosh doesn’t expect any cut in the rest of the financial year, either. “The MPD assists the MPC in formulating the policy. Given the framework and support of the MPD, a late induction is unlikely to have an impact,” said Sameer Narang, chief economist of Bank of Baroda, given that inflation is well above the RBI’s target of 4 per cent and the tolerance upper end of 6 per cent.

Similar sentiment is echoed by bond market participants as well. “The decision during this MPC meeting might be driven more by the RBI governor’s thinking. So, we expect a hold on policy rates, but a continuation of a dovish stance with focus on growth and downplaying of inflation concerns,” said Prasanna Balachander, group executive and head of global markets at ICICI Bank.

However, Devendra Pant, chief economist of India Ratings, said: “It is unlikely that the late appointment of the members will have a significant impact on the outcome of the monetary policy.” 

Madan Sabnavis, chief economist of CARE Ratings, said there should be a pause, and the late induction of members “won’t affect decisions”.  The policy repo rate now stands at 4 per cent, and the reverse repo rate is at 3.35 per cent. The central bank has eased the policy rate by 250 basis points since February 2019, including lowering it by 115 basis points since March 27, after the country went into lockdown due to the pandemic.

The late induction of members notwithstanding, the RBI has good reasons to hold off further rate cuts. Increasingly, the room to lower rates is getting squeezed. While the rate transmission has happened at the lower end of the yield curve, longer-dated bonds have not yet passed on the full rate cuts. And with oversupply concerns taking hold of market sentiment, the RBI is struggling to keep the 10-year bond yields at 6 per cent mark.

“Considering that inflation is running well above the higher end of the target band, the majority of the MPC should be inclined to keep the rates unchanged, based on their mandate. As significant monetary easing has already been provided, the key issue now is the transmission of past cuts and surplus liquidity conditions, to even the longer end of the sovereign curve, along with other market rates,” said Gaurav Kapur, chief economist of IndusInd Bank.

Saugata Bhattacharya, chief economist of Axis Bank, expects a pause, while there could be lots of assurance on “accommodation”. 

Aditi Nayar, principal economist of ICRA, also doesn’t see a cut in the upcoming policy.

Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, expects a pause in policy rates, “irrespective of the timing of induction” of the new policy members.

Harihar Krishnamurthy, head of treasury of FirstRand Bank, said the new MPC members would have to face the high inflation prints, and therefore, the decision should be to pause, especially as in the last monetary policy, the RBI had said rate actions would be taken when the economic numbers turned favourable.

The next rate cut, in all likelihood, could be announced only after taking into consideration Budget numbers in February. “By that time more clarity will emerge, say, on deficit financing, the base effect pulling the inflation down, besides a call can be taken based on the credibility of the budget numbers too,” Pant said.