Expectations – Dinesh Unnikrishnan, Deputy Editor, Moneycontrol: The MPC is caught between a rock and a hard place. On one hand, inflation still remains a major challenge while recovery in economic growth is unlikely to pick up in the desired pace due to a resurgence of Covid pandemic this year which has forced many states to go into lockdowns fully or partially. RBI’s primary concern at this stage is reviving growth. With the RBI caught in the growth-inflation trade off, it will have to probably continue with the accommodative stance and wait for rate action at a more opportune time once clarity emerges on economic recovery.
RBI Monetary Policy LIVE: RBI report cautioned that lockdowns could affect growth recovery
The central bank has already made a slew of announcements in the wake of Covid second wave, including a special liquidity facility to ramp up Covid health infrastructure and a provision for restructuring for smaller companies. Banks have demanded a moratorium for a quarter or so. The RBI may come with more announcements in this context in the near future, if not on the policy day.
On the monetary policy-front, the concerns raised by the MPC members in the last policy review on economic growth recovery remain largely the same. Vaccination progress is yet to pick up in the desired manner. Also, the statewide lockdowns have begun impacting the business momentum on the ground, which has reflected in drop in digital payments in April and May.
“The renewed jump in COVID-19 infections in certain parts of the country and the associated localised lockdowns could dampen the demand for contact-intensive services, restrain growth impulses and prolong the return to normalcy,” the RBI policy said. “In such an environment, continued policy support remains necessary,” it added.
RBI Monetary Policy LIVE: Analysis | No rate action likely, but watch out for FY22 GDP growth estimate
The RBI MPC began its three-day policy review on June 2 and Governor Shaktikanta Das will made the announcement on June 4 (today). The questions are:
Will the MPC go for a surprise announcement or stick to status quo in rates? The consensus among economists is that the central bank will retain its key rates in the face of the continuing uncertainty in the pandemic-hit economy. The trend on both the inflation and growth–the two key variables for policy formulation–largely remain the same as at the time of last policy review.
Although the MPC looks at an inflation band of 2-6 per cent, it looks at a mid-point of 4 per cent as the ideal target. Inflation based on retail prices remain above this medium term target of 4 per cent for quite a long time now. In April, the CPI inflation came at 4.29 per cent compared with 5.52 percent in the March backed by fall in food prices. This is the fifth consecutive month that CPI inflation is within the MPC’s target range. On March 31, the Centre gave the MPC an unchanged inflation target for 2021-22 to 2025-26. If the pandemic-induced lockdowns stay longer than expected, there is a likelihood of prices pressure escalating further putting pressure on the CPI print. A lot will depend on how the monsoon distribution as well.
Perhaps, more than the rate action, the central bank’s outlook on growth will be important to watch. The Gross Domestic Product (GDP) contracted 7.3 per cent in FY21. In the last policy review, the MPC had retained the GDP growth forecast for FY 22 at 10.5 percent. Given that many states are back to complete or partial lockdowns and there are fresh concerns on growth recovery, will the central bank tweak its GDP growth forecast? SBI economists has sharply cut their FY22 GDP growth estimates to 7.9 per cent from 10.4 per cent earlier. Will the MPC too cut the growth projection?
In the last policy review, the RBI had clearly sounded cautious on the evolving growth situation saying lockdowns could hamper growth recovery. Read more here
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RBI Monetary Policy LIVE: Repo rate likely to be unchanged, say experts
Experts told PTI the central bank is likely to keep the benchmark interest rate unchanged given COVID-19 uncertainty and fears over inflation. Repo rate (lending rate) is likely to continue at 4 percent and reverse repo rate (RBI’s borrowing rate) at 3.35 percent. The panel had also left rates unchanged during the last MPC meet in April 2021.
The feeling is also backed by the RBI’s annual report released in May, which stated that 2021-22 monetary policy would be guided by “evolving macroeconomic conditions” till durable growth is achieved “while ensuring that inflation remains within target”.
As per the RBI’s assessment in its report, evolving Consumer Price Index (CPI) inflation trajectory “is likely to be subjected to upside and downside pressures”, while food inflation will “critically depend” on the monsoons. It added that the central bank would ensure comfortable system-level liquidity during 2021-22 in alignment with its monetary policy stance and maintain financial stability while ensuring that transmission continues “unimpeded”. Read more here
This would be the sixth consecutive time the RBI maintains status quo if rates remain unchanged on June 4.
RBI Monetary Policy LIVE: Key rates and economic numbers
>> Repo rate (lending rate) is likely to continue at 4 percent and reverse repo rate (RBI’s borrowing rate) at 3.35 percent.
>> Centre has retained inflation target at 4 percent with the lower and the upper tolerance band of 2 percent and 6 percent, respectively, for the period April 2021-March 2026.
>> Retail inflation (based on CPI), slipped to a three-month low of 4.29 percent in April. Notably, the RBI mainly factors in the CPI while arriving at its monetary policy.
>> India Services Business Activity Index fell to 46.4 in May, down from 54.0 in April, due to renewed declines in new business and output.
>> Composite PMI Output Index, which measures combined services and manufacturing output, was down from 55.4 in April to 48.1 in May, pointing to a renewed decline in private sector activity across India.
RBI Monetary Policy LIVE: What was done amid second COVID-19 wave
India’s central bank unveiled fresh measures in May to help lenders tide over mounting bad loans and give some borrowers more time to repay their debts, as surging COVID-19 infections triggered strict lockdowns in several states.
The RBI in April committed to buying 1 trillion rupees ($13.71 billion) worth of government bonds from the market between April and May in a quantitative easing program it called G-SAP 1.0.
Traders will look to see whether the central bank will announce potentially more aggressive bond purchases under a GSAP 2.0 programme on Friday, and are also eyeing any revisions to growth and inflation forecasts.
Market expectations for larger bond-buying are high after the government recently increased its borrowing for this year.
India’s annual economic growth rate picked up in January-March compared with the previous three months, but economists are increasingly pessimistic about the June quarter after a huge second wave of COVID-19 infections hit the country last month. (Reuters)
RBI Monetary Policy LIVE: Economists expect MPC to hold rates
All 51 economists polled by Reuters expected the MPC to hold rates as Asia’s third-largest economy grapples with various state lockdowns.
The RBI has repeatedly said it will ensure there is adequate rupee liquidity in the financial system to help the economy’s productive sectors and the government’s massive borrowing program, and economists expected it to reiterate that message. (Reuters)
RBI Monetary Policy LIVE: RBI expected to keep rates steady, liquidity steps eyed
India’s central bank will likely keep interest rates at record lows this week as it assesses the economic fallout of the country’s evolving COVID-19 crisis, but the monetary authority is expected to reiterate its commitment on liquidity.
The Reserve Bank of India’s (RBI) monetary policy committee (MPC) will likely keep the key lending rate or the repo rate unchanged at 4 percent for a sixth straight meeting when it announces its decision after a three-day meeting on Friday. (Reuters)
Good morning and welcome to Moneycontrol’s LIVE coverage of the Reserve Bank of India’s (RBI) three-day Monetary Policy Committee meeting held June 2-4, which concludes today. Governor Shaktikanta Das is expected to announce the panel’s decisions after the meet concludes. This RBI MPC met amid economic impact due to the second wave of coronavirus cases in India. Stay tuned for the latest news, developments and updates on the same!