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RBI may skip rate cuts as signs of economic recovery emerge

Though RBI cannot raise interest rates due to the effect of the Coronavirus (Covid-19) pandemic on economic activity, it would still consider the long-term impact of negative real interest rates on the Indian economy, economists believe

twitter-logoBusinessToday.In | November 15, 2020 | Updated 17:23 IST
RBI may skip rate cuts as signs of economic recovery emerge
With inflation hovering above 7% in October for a second straight month, above the RBI's medium term target of 4%, views that India is approaching the end of the current rate cutting cycle have become more relevant.

The Reserve Bank is likely to keep its stance accommodative for the monetary policy despite negative real rates and recovering growth alongside high inflation which limit any possibilities for additional monetary stimulus, economists and analysts said. Industrial output in September rose for the first time in six months while recovery was also seen in goods and services tax collections, higher energy consumption, and an increase in the purchasing managers' index among other economic indicators.

With inflation hovering above 7% in October for a second straight month, above the RBI's medium term target of 4%, views that India is approaching the end of the current rate cutting cycle have become more relevant.

"The inflation rate has been consistently ahead of not only your target rate but the upper end of your target range as well. Ideally, you should be looking at rate hikes right now," Sameer Narang, chief economist at Bank of Baroda told Reuters.

Though RBI cannot raise interest rates due to the effect of the Coronavirus (Covid-19) pandemic on economic activity, it would still consider the long-term impact of negative real interest rates on the Indian economy, economists believe.

High inflation is a risk the RBI cannot afford to ignore, Nomura economists wrote in a note.

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The central bank said on Wednesday that chances for an economic recovery have increased, a comment interpreted by some analysts that the RBI may not act more to boost growth.

If the increase in growth is sustained over the next few months, the RBI sees the economy to return to positive growth in the December quarter.

Moody's on Thursday revised its 2020/21 growth forecast to a 8.9% contraction from its earlier forecast of 9.6%, considering the steady decline in fresh and active COVID-19 cases since September

But COVID-19 is widely considered as the joker in the pack by most analysts.

The RBI is expected to support banks and corporates through lower lending costs till a second wave of Covid infections forces it to provide more direct intervention through  rate cuts.

India's daily coronavirus infections have now fallen below half their peak hit in September, but the economy is still recovering from strict lockdowns to check the COVID-19 spread.

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Since March, the RBI has reduced the repo rate by 115 basis points to insulate the economy from the shock of the growth crisis.

"Given the fragile state of the economy, the RBI is likely to continue with its accommodative stance for a prolonged period," Sujan Hajra, chief economist at Anand Rathi Securities told Reuters.

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