RBI monetary policy announcement today at 10 am: Will MPC revise interest rates, inflation target?

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The three-day monetary policy committee (MPC) meeting has begun on August 4 and the rate-setting panel will announce its decision on August 6. What will be the outcome in this round? It is extremely unlikely that the MPC will tinker with rates and move either way on the rate stance. The reason is simple: nothing has changed significantly since the last policy to warrant a change in the rate stance. The policy stance has been "accommodative" which essentially rules out a rate hike.

A majority of the economists Moneycontrol spoke to expect no change in rates or MPC's policy stance. High inflation and uncertain growth scenario will likely force the policymakers to continue on a wait-and-watch mode for more cues, they said. Some upward revision in inflation may happen though on account of persisting price pressure, mainly from food items.

There is continuing uncertainty both on the inflation and growth front. The closely tracked Consumer Price Index-based inflation (CPI) for the month of June rose 6.26 percent, as food prices hardened further, and transportation costs rose due to higher petrol and diesel prices. The June print came slightly lower than 6.30 percent for May, which was the highest in six months but continues to be above the MPC’s comfort zone of 2-6 percent.

Growth is showing some signs of recovery compared to the massive contraction witnessed in the first wave of Covid. After a 7.3 per cent contraction in FY2020-21, the GDP is expected to grow by less than 9 per cent in the ongoing fiscal, according to most conservative estimates. The RBI and the International monetary fund expect a slightly higher growth this year. But, all will depend on the unfolding Covid scenario. There has been a spike in fresh infections in states like Kerala.

If Covid uncertainty continues, the MPC will prefer to wait and watch, economists said. Even though inflation remains a risk, the MPC’s primary focus is likely to continue tilted towards growth, said Crisil Chief Economist, DK Joshi.

“RBI is likely to keep the growth outlook unchanged but slightly up their inflation forecast,” Joshi said. “Despite this we expect repo rate to remain stable and accommodative stance to continue as growth is seen as a greater risk than inflation at this juncture,” Joshi said.

A similar view was expressed by Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund.

“The MPC meets at the cusp of visibly sticky inflation, nudging growth phase and a fluid pandemic situation world over. The central banker is mostly likely to maintain a status quo on rates being mindful of growth and wait for more data points on the inflation front,” Iyer said. “There could be some steps towards normalisation of liquidity via increased tenor and/or quantum of VRRR (variable-rate reverse repo) – something which bond markets seem to be anticipating,” Iyer said.

In the last RBI monetary policy, the MPC retained the repo rate at four percent and said the growth-supportive accommodative stance will continue as long as necessary till growth is revived. The policy guidance is now based on a data-based approach rather than time-based guidance. The shift happened in April.

The comments of the MPC members were indicative of the fact that despite the recent spike in retail inflation, the rate-setting panel may not shift its stance anytime in the foreseeable future. Growth revival remains the dominant worry. That scenario is unlikely to change till growth scenario improves. It may be too early to talk about policy stance normalisation given the current growth-inflation dynamics and Covid threat.

"Two views of the RBI will be of greater interest this time. One is the view on inflation as it has been stated earlier that the RBI views it as being transient," said Madan Sabnavis, Chief Economist of CARE Rating Agency. "Therefore the view today on the same will be important. The other is on growth. All this time the RBI has given precedence to growth over inflation. Now with growth seemingly better placed, should this still be a concern for the RBI?" said Sabnavis.