RBI Begins 3-Day Deliberations, Likely To Retain Repo Rate, Change Inflation Outlook

The Reserve Bank of India’s rate-setting panel Monetary Policy Committee (MPC) is likely to maintain the status quo on key interest rates and continue its accommodative policy stance on account of inflationary concerns, according to a report by Brickwork Ratings.

“We expect the RBI MPC to hold the repo rate at four per cent and continue to be accommodating to support the nascent recovery, in the upcoming MPC. We also expect it to sound a cautionary note and emphasise the need to closely monitor the situation,” said Dr M Govinda Rao, Chief Economic Advisor, Brickwork Ratings.

The RBI had maintained the benchmarks interest rates, including repo rate – the key interest rates at which the RBI lends money to commercial banks – steady at four per cent, and the reverse repo rate – the rate at which RBI borrows money from banks – at 3.35 per cent, at its policy meet in June 2021, for the sixth time in a row.

The central bank has kept the key policy rates unchanged since May 2020, after having brought them down to a record low of four per cent from 5.15 per cent in an off-policy cycle to assuage the economic consequences when the pandemic first hit the country.

In a recent poll by news agency Reuters, all 61 economists who took part in the survey see no change in the repo rate which has been steady at four per cent since May last year. However, they expect the central bank to make two 25 basis point increases in the next fiscal year, taking the repo rate to 4.50 per cent by end of March 2023.

Inflation was above the two-six per cent band in the medium term during the June-November 2020 period and moved above the upper tolerance threshold in May 2021 (at 6.30 per cent) and in June 2021 (at 6.26 per cent).

The central bank, which mainly factors in the retail inflation while arriving at the monetary policy, has been mandated by the government to keep the consumer price index (CPI) based inflation at four per cent with a margin of two per cent on either side. The RBI, in its last bi-monthly monetary policy review held in June 2021, targeted the retail inflation at 5.1 per cent for the current fiscal.

”Despite the inflation rate surpassing the upper range of the target and surplus liquidity in the market, MPC members had unanimously voted to keep policy rates low to support growth momentum in the previous policy meeting,” said Dr Rao.

”We do not see any change in the forthcoming meeting from this stance, though the MPC may assure markets that the inflationary situation will be closely monitored,” he added.

Reserve Bank of India (RBI) Governor Shaktikanta Das will announce the policy decision on Friday, August 6, at the end of the three-day scheduled review of the Monetary Policy Committee that begins from today – August 4, amid the economy being in nascent stages of recovering from the deadly second wave of the COVID-19 pandemic.

This will be the third bi-monthly monetary policy review for the financial year 2021-22, conducted by the six-member monetary policy committee and headed by the RBI Governor.