RBI's MPC starts deliberations on monetary policy

Experts are of the view that the RBI will refrain from tinkering with the interest rates.

Published - February 03, 2021 04:49 pm IST - Mumbai

Reserve Bank of India (RBI) logo. File

Reserve Bank of India (RBI) logo. File

The Reserve Bank's rate-setting Monetary Policy Committee (MPC) began its meeting on Wednesday and is likely to hold interest rates and continue with accommodative policy stance so that necessary monetary action could be taken to push growth.

This is the first MPC meeting after the presentation of the Union Budget 2021-22.

Although the bi-monthly monetary to be announced on February 5 is likely to refrain from cutting benchmark repo rate, it will ensure availability of adequate liquidity which will be needed to spur investment in the infrastructure sector.

The six-member MPC headed by RBI Governor Shaktikanta Das has started its deliberations. After the three-day meeting, resolution of the MPC would be announced on February 5.

The MPC kept the key benchmark rate unchanged in its last three reviews. The current repo rate – rate at which RBI lends to banks – is at a record low of 4 %. The reverse repo rate – rate for funds parked by banks with RBI – is 3.35 %.

The RBI had last revised its policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting interest rate to a historic low. The central bank has cut policy rates by 115 basis points since February last year.

Experts are of the view that the RBI will refrain from tinkering with the interest rates and keep the monetary stance accommodative at the policy review.

Aditi Nayar, Principal Economist at Icra, said that even though the CPI inflation dipped in December 2020, the trajectory remains unpalatable.

"We expect an extended pause for the repo rate, with the stance to be changed to neutral in the August 2021 policy review or later, once there is clarity on the durability of the economic recovery," she said.

Jyoti Prakash Gadia, Managing Director of Resurgent India, expects a status quo to be maintained by the RBI in policy rates, with a pause for the first quarter of the next fiscal.

The announcement of an expansionary Budget entails large scale additional government borrowings, which will have an impact on interest rates, Ms. Gadia said.

"A shift from the accommodative stance may not emerge in the short run, as the position gets cleared on the inflation and interest rate benchmarks. The continued tilt in favour of growth, in the growth-inflation tradeoff is the need of the hour and the basic expectation," Ms. Gadia added.

Deepak Rai, Director Finance at Team Computers, said it would be interesting to see the RBI monetary stance particularly in the wake of the recently presented Budget, which has pegged fiscal deficit at 6.8 % for 2021-22.

This means government borrowings are likely to be on the higher side and hence, it would be challenging for the apex bank to continue with softer interest rate regime for long, he said.

"At the same time, considering that economy is yet to recover fully from COVID impact, the softer interest regime is warranted. Hence, it is a catch 22 situation for RBI," Mr. Rai added.

Property consultant Anarock chairman Anuj Puri said the RBI may consider keeping the rates on hold, with an eye on how the inflation and the economic recovery pans out in the coming months.

"Given that housing demand is seeing green shoots of revival... further cut in repo rate would have given an added boost to the residential segment. However, we may see RBI maintaining status quo in repo rates," Mr. Puri said.

India's economy is likely to rebound with a 11 % growth in the next financial year as it makes a "V-shaped" recovery after witnessing a pandemic-led carnage, as per the Pre-Budget Economic Survey tabled in Parliament.

The Gross Domestic Product (GDP) is projected to contract by a record 7.7 % in the current fiscal ending March 31, 2021.

CPI inflation eased sharply in December primarily on account of a substantial correction in food inflation – by 5 percentage points – to 3.9 % in December from 8.9 % in November.

Under the current dispensation, the RBI has been mandated by the government to maintain retail inflation at 4 % with a margin of 2 % on either side. The inflation target has to be reviewed by end-March 2021.

The government will borrow ₹ 12.05 lakh crore from the market in 2021-22, lower than the ₹ 12.80 lakh crore estimated for the current financial year.

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