RBI says it has decided to 'look through' the current 'high inflation' as it won’t last long but leaves interest rates unchanged
Monetary Policy Committee( MPC) leaves the repo and reverse repo rateunchanged at 4% and 3.35%, respectively.
- RBI expects inflation to ease closer to the target between January and March next year.
- For the entire year, the MPC has pegged the real GDP to show a decline of 9.5%.
“MPC has decided to look through the current inflation as a transient hump,” Governor Das explained, adding that inflation will ease between January and March next year.
The MPC has an inflation band of plus or minus 4% to keep a watch on. However, over the past five months, retail inflation has remained above the 6% ‘comfort band’. While inflation is expected to remain above 6% in September as well, it's likely to start coming down there after as supply chains open up.
"Supply chain disruptions and margins and mark ups are the major factors driving up inflation," said Das.
As inflation eases, the MPC also expects GDP growth to break out of contraction and turn around. For the entire year, the MPC pegged the real GDP decline at 9.5%. The forecast is at par with the World Bank’s expectations, which slated India’s GDP to dip by 9.6% by the end of the current fiscal.
This is the second consecutive MPC meeting where they have not touched policy rates. However, since 2019, the MPC has cut rates by 250 basis points (bps). One hundred basis points make 1%.
India’s path to recovery
“In my view, it is likely to be a three-speed recovery with individual sectors showing varying paces, depending on specific realities,” said Das.
According to him, the agricultural and allied sectors will lead India’s recovery, followed by two-wheelers, passenger vehicles and tractors, drugs and pharmaceuticals. Manufacturing’s capacity utilisation is expected to recover in the next three months and gain traction.
The second set of sectors to recover are those affected more severely by social distancing and are contact-intensive.
“RBI’s status quo on rates was along expected lines, given the elevated inflation. But the MPC clearly delivered accommodative moves through non-interest rate tools,” said Amar Ambani, the senior President and head of research for institutional equities at YES Securities.
The central bank announced to expand weekly open-market-operations (OMO) purchases to ₹25,000 crore and TLTRO of ₹1 lakh crore. State Development Loans will also now be a part of its purchases.
“We see a possibility of further scope of 25-50 basis points cut in repo policy rates,” said Ambani.
This was the MPC first meeting with three external members recommended by the government — Ashima Goyal, who is a member of Prime Minister’s Economic Advisory Council (PMEAC); Shashanka Bhide, a senior advisor at National Council for Applied Economic Research and Jayanth Verma, who is a professor at the Indian Institute of Management, Ahmedabad (IIM-A).
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