HYDERABAD: The Reserve Bank of India (RBI) is unlikely to cut key policy rates on Thursday amid concerns of rising inflation and fiscal deficit.
The central bank’s Monetary Policy Committee (MPC) during its last policy review for the current fiscal, is expected to maintain status-quo both on rates and its policy stance currently set at accommodative.
Repo rate now stands at 5.15 per cent.
Headline inflation rose to a 5-year-high of 7.35 per cent in December, which forced the MPC to hold rates during its previous meeting.
Moreover, as per RBI’s projections, inflation may remain elevated at least until March, by when food prices are expected to subside.
That said, four key elements will figure among the top and could even be the guiding force for MPC this time.
One, global crude prices fell to about $54 per barrel and could lower the country’s import bill to hover around that level for a while.
Two, the recent Budget announcement of a price stabilisation fund to shield households from sudden and steep vegetable price rise, gives enough ammunition for MPC to avoid missing its inflation target influenced by food prices.
Three, the breach in FY20 fiscal deficit target, which MPC saw coming, could unsettle the monetary policymakers about next fiscal.
Lastly, rate transmission remains an unfinished agenda, and the onus remains with the central bank to ensure that bond yields and rates remain low to avoid putting pressure on government borrowings.
“The Union Budget has estimated a higher fiscal deficit of 3.8 per cent for this year and a glide path to 3.5 per cent. Inflation is likely to trend at a level higher than RBI’s 4-4.5 per cent target this quarter. Against this backdrop, RBI is likely to maintain status quo on rates as well as its monetary policy stance. They are likely to continue an accommodative stance to support growth,” said Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank.
In 2019, MPC cut rates five times in a row by a total of 135 basis points. It kept the interest rates unchanged after its previous policy review in December.
According to Ekambaram, GDP growth continues to be a challenge. While FY20 growth will be around 4.8-5 per cent and 5.5-6 per cent range in FY21, he said some green shoots were, however, visible.
“Recent high-frequency indicators show some green shoots, including IIP (index of industrial production) numbers for Jan. However, need to see how the growth trajectory pans out,” he said.