‘Dovish’ MPC seen holding rates on inflation overhang

The Monetary Policy Committee (MPC), with three new external members, is likely to maintain status quo on the policy repo rate as the August retail inflation reading of 6.69 per cent was above the Reserve Bank’s upper tolerance level of 6 per cent.

Following the appointment of Ashima Goyal (Professor at the Indira Gandhi Institute of Development Research), Jayanth R Varma (Professor at the Indian Institute of Management, Ahmedabad) and Shashanka Bhide (Senior Advisor at the National Council for Applied Economic Research) as members, the MPC meeting was re-scheduled for October 7-9.

While experts believe that the new external members may be more dovish in their views, there may not be any immediate impact on the policy decision. In a recent article in

BusinessLine , Ashima Goyal had stated that the RBI should look at the consumer inflation spike as being due to temporary supply disruptions and the policy stance “should remain accommodative, with space for future cuts clearly indicated”.

 

‘Room for rate cuts’

Jayanth Varma had, last year, commented on how the mid-2018 rate hike was a mistake, which took too long to correct, and alluded to the ‘stunning lack of monetary transmission’.

Rahul Bajoria, Chief India Economist, Barclays Securities (India) Pvt Ltd, said: “We do not believe the new appointments will dramatically change the near-term monetary policy outlook.”

At its last policy meeting, the RBI’s six-member monetary policy committee voted unanimously to hold interest rates at 4 per cent.

Bajoria said: “Although the statement acknowledged the room for further rate cuts, the commentary made them contingent on a ‘durable reduction’ in inflation. Given our new inflation forecast trajectory, we believe that room to cut rates further will likely open up only in Q1 (January-March) 2021. Hence, we expect a one-off rate cut of 25 basis points in the February 2021 MPC meeting. In the meantime, the central bank may continue to ease financial conditions through liquidity and regulatory measures.”.

Anagha Deodhar, Research Analyst, ICICI Securities, observed that going into the October review, the last available inflation print is for August, which is uncomfortably high at 6.7 per cent.

 

Monetary policy in right direction, but more needs to be done to push up demand, production: Rangarajan

GDP concern

While the GDP contraction of 23.9 per cent in the first quarter is definitely a cause for concern, the MPC has already delivered a cumulative 115 basis points cut in repo rate this year.

The committee may want the previous two repo rate cuts to work their way into the lending rates and keep the powder dry when retail inflation eases.