Reserve Bank of India (RBI) Governor Shaktikanta Das-led Monetary Policy Committee (MPC) is expected to maintain status quo on policy rates in its last monetary policy for the current financial year, despite the economic slowdown. The MPC, which began its three-day meeting on February 4, will announce its decision on its key lending rates -- repo rate and the reverse repo -- on February 6.
Amid spike in inflation, most economists expect the central bank to hold rates, adding that the panel might wait for an ease in food prices to see how inflation pans out in coming months. According to a Reuters poll of economists, the RBI is expected to keep the repo rate unchanged until October.
India's retail inflation rose to five-year high of 7.35 per cent in December from 5.54 per cent a month ago, limiting the scope for a rate cut to boost growth. Some economists remained divided on whether the central bank would continue to retain 'accommodative' stance, Reuters reported.
In a surprise move, the RBI had maintained a status quo in December, leaving the key repo rate-- the rate at which it lends to banks -- at 5.15 per cent amid rising concerns over inflation. The halt came after five consecutive cuts totalling to 135 basis points in 2019.
At its December meeting, the RBI revised the CPI inflation projection for the second half of 2019-20 to 5.1-4.7 per cent from 3.5-3.7 per cent forecast at its October meeting. The central bank expects food inflation to remain high in the next six months. The RBI is also worried about core inflation, which is currently stable. The recent tariff hikes by telecom service providers have increased the risk of pushing up core inflation and, consequently, CPI numbers, which the RBI targets.
The government has estimated India's gross domestic product (GDP) to be growing at a slower pace of 5 per cent in the current financial year, in line with the RBI's estimates. The Economic Survey 2019-20 has projected the Indian economy to grow at around 6-6.5 per cent in the next financial year beginning April 2020.
In December meeting, the RBI had reduced its GDP forecast for the financial year 2020 to 5 per cent from 6.1 per cent earlier.
"We look for the central bank to remain on an extended pause on rates (even as supply-induced shocks dissipate) but maintain an accommodative bias to ensure cost of capital remains stable and favourable," Radhika Rao, senior vice-president and economist, DBS Group Research, said.
Crisil Ratings in its post-Union Budget 2020-21 comment has said, "Monetary policy has done its bit, but with moderate and slow success." It added that the RBI cut the repo rate cumulatively by 135 basis points (bps) through calendar 2019, but lending rates tarried with just nearly 50-bps decline. Even as credit demand has fallen, risk aversion and weak sentiment have affected the willingness to supply credit, too."
By Chitranjan Kumar