Home / Finance / News / Post Budget proposals, analysts see RBI holding rates in February MPC meet
Post Budget proposals, analysts see RBI holding rates in February MPC meet
Following the November print of 5.54%, RBI had sprung a surprise and opted to hold the repo rate at 5.15 per cent. It, however, continued with the accommodative stance as long as it was necessary.
After the Budget presentation last week, investors are now looking forward to the Reserve Bank of India’s (RBI) February bi-monthly policy outcome. The central bank’s monetary policy committee (MPC) began its three-day meeting on February 4, and will announce its decision on February 6.
Most economists expect the central bank to maintain a status quo today, even as they remain divided on whether the central bank will continue to retain the 'accommodative' stance as regards the tone of the policy.
Aditi Nayar, principal economist at ICRA, for instance, expects the RBI to maintain status quo on February 6, but sees the stance changing from ‘accommodative’ to ‘neutral’. Besides, she sees the apex bank extend the pause to, at least, one more MPC meeting due to prolonged inflationary pressures.
ICRA pegs the average inflation in Q4FY20 at 5.6 per cent, and expects the RBI to revise upwards its inflation target for the next three quarters.
“In 2019, the RBI had become increasingly responsive to global and domestic growth concerns. We expect this to fade as it gets further comfort from the announcements in the budget,” wrote analysts at Goldman Sachs in a recent note. They expect the RBI to keep the policy rates on hold, with ‘neutral’ stance.
Retail inflation shot to about five-and-half year high of 7.35 per cent in December 2019, surpassing the RBI's comfort level, mainly due to spiralling prices of vegetables.
Following the November print of 5.54 per cent, RBI had sprung a surprise and opted to hold the repo rate at 5.15 per cent. It, however, continued with the 'accommodative' stance as long as it was necessary to revive growth while ensuring that inflation remains within the target.
The focus then had shifted to the Union Budget, which delivered a new tax regime with lower, but conditional, income tax rates in order to increase the purchasing power of the people. The revised system, however, may not have the desired effect, say analysts.
Though the revised income tax rates will put more money in the hands of the people falling in the middle-income tax bracket and is likely to boost consumer spending to some extent, one of the primary reasons for the current slowdown is weak rural demand, argues Rumki Majumdar, economist at Deloitte India.
“Any incremental demand can be met by industries, which currently have an excess capacity... Therefore, the possibility of inflationary or demand pressures for goods other than food in the near future may remain low, which could prompt the RBI to remain accomodative, but hold rates in the February policy review," she says.
"While we expect the RBI to maintain status quo, and accommodative stance, on February 6, we see only one rate cut going forward in FY21," says Devendra Pant, chief economist at India Ratings and Research. He adds that the inflationary pressure, though cyclical in nature, needs to be tracked on monthly basis to decide the next rate cut.
“A prolonged deleveraging cycle and a clogged financial sector mean that any growth recovery from the current downturn will take much longer. We also expect the RBI to leave policy rates unchanged and retain its accommodative stance in the upcoming policy review on February 6,” wrote Sonal Varma, managing director and chief India economist at Nomura in a post Budget note.
RBI & MARKETS
Analysts say that the markets are pricing in a status-quo in the February policy meeting and would now track the Modi-Trump meeting for further direction.
“Markets shouldn’t react negatively to the status-quo as they have corrected already post Budget… That said, the next near-term event for the markets will be the meeting between US President Donald Trump and Prime Minister Narendra Modi,” says Ambareesh Baliga, an independent market expert.
According to reports, India and the US could sign a trade deal in the second week of February -- that has been stalled since September last year – ahead of Trump’s visit to India that is expected between February 24-26.
That apart, Baliga says the shift of engineering and speciality chemical firms from China to India in the wake of coronavirus, too, could affect movement in markets.
To read the full story, Subscribe Now at just Rs 249 a month