Monetary Policy: RBI unlikely to cut lending rates for 8th time in a row

Image Source : PTI (FILE)

Reserve Bank of India Governor Shaktikanta Das

The Reserve Bank of India (RBI) is likely to retain key lending rates as well as maintain the accommodative stance to support growth when it presents the third bi-monthly monetary policy.

RBI Governor Shaktikanta Das in the previous MPC meeting decided to keep the repo rate unchanged and continue with the accommodative stance as long as necessary to support growth. Since March 2020, RBI has slashed repo rates to a record low of 4 per cent through two rate cuts of 75 bps in March 2020 and 40 bps in May 2020.

The three-day meeting of the six-member Monetary Policy Committee (MPC) started on Wednesday amid rising global commodity prices and the need to contain inflation at home.

Experts are of the view that the central bank will maintain the status quo on policy rates for the eighth time in a row. The policy repo rate or the short-term lending rate is currently at 4 per cent, and the reverse repo rate is 3.35 per cent.

Ranen Banerjee, leader (Public Finance and Economics) at PwC India opined that the latest statements by the US Fed Chair on possible actions if inflation does not wear off by H1 of 2022 is a clear commencement of chatter around rate action after the clarity on taper timing. “This will have a bearing on the stance of the MPC as it will also be worried on the inflation front given the oil, natural gas and coal prices showing no signs of abetting and rather continuing to have an upward bias,” he said.

However, it is very unlikely that there will be any rate action given the inflation is within the tolerance band and the 10-year yields keep hovering slightly above 6 per cent, Banerjee said.

M Govinda Rao, Chief Economic Advisor of Brickwork Ratings, said with the consumer price inflation easing from 5.59 per cent in July to 5.3 per cent in August, improved supply situation on the back of the pandemic-led restrictions being relaxed, and capacity utilisation still in the recovery mode, there is no immediate pressure on the MPC to either alter interest rates or change the accommodative stance.

Dhruv Agarwala, Group CEO, Housing.com, Makaan.com and PropTiger.com, said even though most growth indicators currently show positive signals, the RBI is expected to maintain a status quo on key policy rates to maintain financial stability and boost demand during the ongoing festive season. He also said that home loans are currently available at interest as low as 6.50 per cent annual interest.

“The continuation of this historically low interest rate regime for the entire festive season is a must for India’s real estate sector, the second biggest employment generating sector in India, to regain its strength,” Agarwal added.

The RBI has projected the CPI inflation at 5.7 per cent during 2021-22 — 5.9 per cent in the second quarter, 5.3 per cent in third, and 5.8 per cent in the fourth quarter of the fiscal, with risks broadly balanced. CPI inflation for the first quarter of 2022-23 is projected at 5.1 per cent. The CPI inflation was at 5.3 per cent in August. The inflation data for September is scheduled to be released on October 12.

If the RBI maintains status quo in policy rates on Friday, it would be the eight consecutive time since the rate remains unchanged. The central bank had last revised the policy rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting interest rate to a historic low. The RBI has been asked by the central government to ensure that the retail inflation based on the Consumer Price Index remains at 4 per cent with a margin of 2 per cent on either side. The Reserve Bank had kept the key interest rate unchanged in its after monetary policy review in August citing inflationary concerns.

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