NEW DELHI: The Reserve Bank of India is likely continue leaving key policy rates unchanged at its credit policy meeting slated for next week given the high rate of inflation.
Finance ministry officials, however, hope that the central bank will continue with its overall stance in favour of rate cuts, given the fact that the economy has technically entered into a recessionary phase at the end of the second quarter of this fiscal year. India’s retail inflation rate, meanwhile, shot up to 7.61 per cent in the month of October.
The government has mandated the central bank to keep retail inflation within the range of 4 per cent with a margin of 2 per cent on either side.
“Though the rise in retail inflation is mainly on account food prices, core inflation, which measures industrial and retail non-food goods, has also gone up to 5.47 per cent and may remain stubborn, given that drivers like energy and transport costs are likely to go up in the future,” a senior official said. RBI has already cut interest rates by 115 basis points this year, taking the repo rate down to 4 per cent, the lowest since it was introduced in 2000.
The chairman of a Delhi-based public sector bank said that reductions in policy rates may not have any salutary impact on growth given the fact that there “was enough money in the system for credit needs, it is more a question of demand for credit rather than availability.’ North bloc would, however, like the central banker to retain its positive stance towards rate reductions given the fact that the second quarter GDP growth figures are likely to be in the range of minus 7.5-10.5 per cent.
“As the RBI has earlier pointed out, we are technically in recession and a combination of fiscal and monetary measures are needed to speed the pace of economic recovery in the post-Pandemic period,” an official said.
Nevertheless, improvements in several high frequency data such as GSTST collections, energy consumption, automobile production, and revival of consumer demand, besides the sharp reduction in negative growth from -23.9 per cent in the first quarter to single or near single digits are being seen as positives, allowing a delay in rate cut measures until inflation has been tamed.
In a research report on emerging markets, Barclays pointed out that it “expects the Reserve Bank of India’s (RBI) monetary policy committee to keep rates steady, even though... inflation and growth forecasts (are expected) to be revised higher”. Officials also said that while food inflation will come down by December, with global crude prices rising in anticipation of a Covid vaccine, central banks across the globe “would be understandably cautious about inflation rates.”
Rising crude rates a danger sign
Officials said that while food inflation will come down by December, with global crude prices rising in anticipation of a Covid vaccine, central banks would be cautious about inflation rates.