RBI seen holding rates; liquidity stance watched

Eye on high retail inflation, RBI may maintain status quo

Eye on high retail inflation, RBI may maintain status quo

On the other hand, persistently high inflation will deter the RBI's Monetary Policy Committee to administer a dose of lending rate cut.

In its October policy review, the committee made a decision to continue with the accommodative stance as long as necessary - at least during the current financial year and into the next financial year - to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target (of 4 per cent within a band of +/- 2 per cent) going forward.

In the October meeting, Saggar had said that while inflation is above the upper tolerance band, it is not monetary in nature and that supply disruption in food, increase in taxes on fuel and liquor and a surge in gold rates have lifted prices.

Since the outbreak of the pandemic in India in March, the MPC has cut the repo rate cumulatively by 115 basis points in two tranches - from 5.15 per cent to 4.40 per cent on March 27 - and from 4.40 per cent to 4 per cent on May 22.

Amar Ambani, Senior President & Institutional Research Head at Yes Securities said with frequency indicators and GDP data conveying meaningful rebound in economic activity and retail inflation remaining stubbornly high, "we not only expect the RBI to maintain status quo in December 2020 policy meeting, but the minimal chance of a 25 bps rate cut in February 2021 also appears to be fading away". Retail inflation has been inching upwards in recent months and rose to a 9-month high of 7.6 per cent in October.

"However, the accommodating stance is likely to continue", Rao added.

"Inflation will remain elevated for the next few months". The major factor responsible for the spike in inflation is food prices. The target is set within a band of (+/-) 2 per cent.

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"With inflation at an elevated 7.6 per cent in October, and a faster than expected narrowing in the pace of GDP contraction in Q2FY21, we see no space for a rate cut in this policy review, even though the accommodative stance would continue", said Aditi Nayar, Principal Economist, ICRA.

As per the government data, the gross domestic product (GDP) had expanded by 4.4 per cent in the corresponding July-September period of 2019-20.

"We believe that balancing the monetary policy under such a challenging environment would prove to be hard and will need the deployment of all available "firepower" with the RBI", Chowdhury added.

However, with the economic growth continuing to remain in the negative territory for the second consecutive quarter ending September, the central bank is likely to continue with the accommodative monetary stance keeping the hope alive for a rate cut as and when needed. Economists and market participants are closely watching the commentary from the RBI around liquidity.

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Notably, the RBI has been credited to have effectively managed the bond yields in the face of the challenges on the fiscal, inflationary and the currency front.

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