RBI likely to maintain rates, accommodative stance

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SME Times News Bureau | 04 Aug, 2021
In a quest to sustain economic growth, the Reserve Bank is expected to continue with its easy monetary policy as well as the accommodative stance.

Accordingly, economists and industry experts, cited that despite high retail inflation, growth concerns will act as a major deterrent for any tightening of monetary policy.

Besides, a growth-boosting accommodative stance is expected to be maintained in the third monetary policy review of FY22.

"We expect a pause on rates and the stance, amid an upward revision in the inflation projections," said Aditi Nayar, Chief Economist, ICRA.

"This will inject uneasiness into the tone of the policy, even as the MPC is likely to endeavour to support growth for as long as possible."

The MPC has maintained the repo - or short-term lending rate - for commercial banks at 4 per cent.

It will release the monetary policy resolution on August 6.

"We don't expect any action on interest rates or any major step towards recalibration of systemic liquidity at this point in time," said Suman Chowdhury, Chief Analytical Officer at Acuite Ratings and Research.

"The combination of elevated commodity prices, Covid related disruptions, vaccination progress, and policy support led economic revival has resulted in an acceleration in inflation in most countries including India."

Consequently, the high rate of retail inflation has led to expectations of a readjustment in monetary policy.

However, systemically important central banks, including the RBI, have so far treated the rise in inflation as 'transitory', while continuing to focus on supporting growth recovery.

Notably, the benchmark CPI inflation in India has remained above 6 per cent over the months of May and June and is likely to remain sticky in the near future.

On the other hand, a strong kharif crop output led by a favourable monsoon and the easing of supply bottlenecks from a tapering down of the pandemic may partly cool down the inflationary pressures from Q3FY22.

"MPC may still choose to look through the spike in inflation in the near term, with the monetary reaction function currently hinging more on growth revival becoming sustainable," said Madhavi Arora, Lead Economist, Emkay Global.

"We still do not see any change in policy rates this year."

A policy tightening, if administered, would theoretically force commercial banks to increase their lending rates, thereby, burdening both consumers and the industry with expensive finance.

Subsequently, the decreased money flow in the hands of the consumers would dampen demand, and reduce the capital flow needed for investment cycle.

Nevertheless, this would have stunted the high retail inflation.