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RBI's MPC may keep policy rates unchanged in August: DBS

RBI's MPC may keep policy rates unchanged in August: DBS

RBI is likely to keep policy rates unchanged in August and maintain the repo rate at 4 per cent in its upcoming meeting. The RBI MPC will meet from August 4 (Wednesday) to August 6 (Friday)

The RBI will factor in inflation risks through close monitoring and abstain from tweaking the policy levers, for now, Radhika Rao, senior economist at DBS said The RBI will factor in inflation risks through close monitoring and abstain from tweaking the policy levers, for now, Radhika Rao, senior economist at DBS said

Singapore-based financial services group DBS believes the monetary policy committee (MPC) of the Reserve Bank of India (RBI) is likely to keep policy rates unchanged in August and maintain the repo rate at 4 per cent in its upcoming meeting. The RBI MPC will meet from August 4 (Wednesday) to August 6 (Friday).

The central bank's forward guidance will endorse a continuation of the accommodative policy stance to protect against growth risks, particularly the third COVID-19 wave. The RBI will factor in inflation risks through close monitoring and abstain from tweaking the policy levers, for now, Radhika Rao, senior economist at DBS said in a note dated July 30.

"The preference to gradually draw out excess liquidity might increase the sizes of variable repo rate auctions while reaffirming support for the ongoing G_SAP program. The impact of a VRRR increase might be marginal given the scale of surplus liquidity (estimated at Rs 7.5 lakh crore- Rs 8 lakh crore) - bank liquidity government cash balances," Rao further noted.

Regardless, it supports the RBI's intent to mop up liquidity at a calibrated pace prior to preparing for an increase in the reverse repo rate and a change in policy stance either around 2021-end or in early 2022.

Rao stated that global factors might find a mention, but they are not likely to trigger domestic price action. She mentioned US Fed Chair Jerome Powell's comments about scaling back bond buying at the recent Federal Open Market Committee (FOMC).  

Rao noted that since the last rate review in June, "policymakers have had two months' of inflation prints on hand and a host of high-frequency indicators that signal that the economic momentum has largely recovered from the slump caused by the second wave of the pandemic." The latest monthly RBI report reflects this confidence but also raises a few red flags, she added.

As per the note, hastened vaccination rollout, a turnaround in activity indicators, and buoyant agricultural output (dependent on weather conditions) are some reasons to remain hopeful.

Nonetheless, a slower improvement in aggregate demand, snail-paced reopening of the services sector and the risk of a third COVID-19 wave tempered optimism around economic recovery.

"Watch the tone on inflation after CPI inflation held firm at 6.3% y/y for a second month in June. Notwithstanding these elevated prints, RBI Governor Das had recently emphasised that inflation was still largely supply-driven, referring to it as a temporary hump and expecting it to moderate by late-2021," Rao noted.

Edited by Mehak Agarwal

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