RBI to retain key rates, maintain accommodative stance in Feb policy meet

The Reserve Bank of India (RBI) Governor Shaktikanta Das-led monetary policy committee (MPC) is expected to keep key rates unchanged in its last monetary policy meeting of the current financial year. As per market experts, the central bank is expected to maintain status quo and keep the monetary stance accommodative at the policy review though it will take guidance from the Union Budget 2021 to be unveiled by the Finance Minister Nirmala Sitharaman on February 1. The RBI MPC, the panel which sets interest rates, will start three-day meeting on February 3, will announce its decision on its key lending rates - repo rate and the reverse repo - on February 5.

"We expect the MPC to continue the pause. The fall in inflation rate was mainly due to fall in food prices. The core inflation rate has not come down. Excess liquidity needs to be watched. The vaccine availability is not going to impact macro economy immediately," PTI quoted M Govinda Rao, Chief Economic Advisor, Brickwork Ratings, as saying.

Retail inflation, calculated on the basis of Consumer Price Index (CPI), has been above the RBI's upper bound inflation target of 6 per cent for more than 11 months. However, it has shown some declining trend over the past few months, thanks to decline in vegetable prices. CPI inflation surged to six-year high of 7.6 per cent in October, before easing marginally to 6.93 per cent in November and further to 4.59 per cent in December 2020.

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Economist at India Ratings and Research also expect status quo in the policy rate as the December number has shown that the CPI has somewhat moderated.

"Growth needs to be supported through the monetary policy and that is the reason the accommodative stance of RBI will continue," says Sunil Kumar Sinha, Principal Economist and Director-Public Finance, India Ratings and Research. He added that there is limited room for further policy rate cut and the RBI would not like to use it when the economy is already reviving.

On expectations from the MPC, Aditi Nayar, Principal Economist, ICRA Limited, said that even though the CPI inflation dipped in December 2020, the trajectory remains unpalatable.

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"We expect an extended pause for the repo rate, with the stance to be changed to neutral in the August 2021 policy review or later, once there is clarity on the durability of the economic recovery," she said.

In the last MPC meet on December 4, the RBI had kept benchmark repurchase (repo) rate unchanged at 4 per cent amid concerns over elevated inflation, but maintained an accommodative stance, implying more rate cuts in the future if need arises to support the economy hit by the COVID-19 pandemic. RBI Governor had pegged CPI (consumer price index) inflation at 6.8 per cent for December quarter and 5.8 per cent for March quarter of the current fiscal (FY21). For H1 FY22, inflation is predicted to hover in the range of 4.6 per cent to 5.2 per cent with risks continuing to be broadly balanced.

The central bank had cut the repo rate by 115 basis points since February last year to support growth. It had last revised its policy rate on May 22, in an off-policy cycle to perk up demand by cutting interest rate to a historic low.

With PTI inputs