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Is MPC's 'accommodative' stance losing its meaning amid high inflation? 5 key takeaways on RBI’s growth-inflation conundrum
The monetary policy committee (MPC) has retained the key rates in its policy review amid the pandemic worries. It has voted for growth, ignoring the near-term pressure on inflation. The MPC has largely affirmed the guidance it gave in the October policy—to continue with the ‘accommodative stance’ as long as necessary to support growth. It has opted for status-quo in the last few policies despite being in an ‘accommodative’ stance.
Now the key question--can the MPC cut rates going ahead (which is what the stance suggests) or shift focus to inflation management that is clearly not the focus now? High inflation prevents the MPC from easing the policy rates no matter what stance it takes. Read here for the five key

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Deepak Chandnani, Managing Director, Worldline South Asia and Middle East: "The RBI’s decision to increase the limit from Rs. 2000 to Rs. 5000 without entering a PIN on contactless transactions through NFC cards is a welcome move. We have in recent months seen a marked increase in contactless transaction on our network. This is because of the fact that the entire transaction is contactless with no one but the cardholder touching the card and also very importantly the ease of use. NFC transactions follow safety protocols as specified by RBI and Payment Schemes and cardholders can be assured that their transactions are being conducted in a secure manner.”

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Prof. Krupesh Thakkar, CFA, HoD Financial Markets, ITM B-School, Navi Mumbai: "The RBI has kept the key interest rates unchanged, repo at 4% and reverse repo at 3.35%, for the third straight time. Though, it has kept its accommodative stance, the concern is on rising inflation. This was also evident as CPI for the month of October 2020 came at 7.61%, which above 6% for 7 months now. Both supply side factors and rise in commodity prices are still daunting the inflation. Of course, the borrowers might not see their EMIs going down but this is a huge relief for larger fixed deposit investors and the FD rates will hold steady for now. This is indeed a good news as the ample liquidity in the systems is already putting a downward pressure on short term rats, which RBI too has noted. Going forward, we need to observe, high quickly the headline inflation falls below the RBI threshold limit of 4%, to give us any hope of rate cuts."

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Nish Bhatt, Founder & CEO, Millwood Kane International: “The status quo policy by RBI is on expected lines. The assurance by the RBI to maintain surplus liquidity in the system to help boost demand and economic recovery is a big positive. It indicates easy rates to continue well into 2021. The status quo on the policy stance signals rate easing in the near future provided inflation remains under control. While the RBI hiking the inflation forecast is a cause of worry but the projection of growth rate swinging back to positive in Q3, Q4 indicates the worst may be over. The RBI keeping rates low despite high inflation shows its focus to boost economic growth over keeping inflation under check which is majorly a supply-side issue. The RBI policy is supportive of growth and in sync with the government's reform agenda.”

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Gaurav Garg, Head of Research, CapitalVia Global Research: "RBI, in its 5 th bimonthly MPC meet, followed the accommodative stance and kept rates unchanged. RBI kept repo rates at 4.00% and Reverse Repo unchanged at 3.75% with unanimous voting by all MPC members. Inflation was at a higher level in the last few quarters however, CPI inflation is estimated at 6.8% in Q3FY21. CPI inflation is expected to be at 5.8% for Q4FY21, and 5.2-4.6% in H1FY22 which might give RBI a room to continue the low interest rate regime. There have been a lot of positive events over the past month. Vaccine trials have been successful and the recovery rate in India has crossed 94% which gives a relief from further spread and the second wave of novel coronavirus. Q2 results were also better than expected for most of the companies and profit margin improvement and good growth might sustain in coming quarters as well. Healthy business growth and demand pick-up is expected to push the GDP growth in positive territory by Q4 of this financial year. RBI is expecting a strong pick up in rural and urban demand, however, lower than expected Private investment is a sign of worry. Exports are likely to go up after implementation of the vaccine programme in various developed economies. Real GDP change for FY21 is projected at a contraction of 7.5%. Projecting 0.1% growth for Q3 and 0.7% growth for Q4. RBI has successfully taken some steps which has helped in revival of economy. This low rate regime is going to fuel growth and pull India out of contraction towards positive growth rate sooner than expected."

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Amar Ambani, Senior President and Head of Research - Institutional Equities, YES SECURITIES: "In line with the expectations, RBI decided to stand pat on the policy rate and updated growth and inflation outlook given that inflation remains stubbornly high, while growth is gaining traction. The central bank scaled down on its earlier pessimistic GDP projection for FY21 as the frequency indicators and GDP data convey meaningful rebound in economic activity in both rural and urban demand. Inflation will remain as a hindrance for next two quarters and will dissuade further policy rate cuts at least for FY21. MPC did not unleash new on the non-interest rate tools, as significant measures (OMOs, TLTROs) have already been announced during the last policy meeting. The fact that liquidity remains high, while growth is gaining traction, makes us believe that RBI will adopt a wait and watch approach for next few months. Nevertheless, the MPC reiterated its accommodative stance given the transitional phase the economy is going through, in terms of recovery from the pandemic."

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Padmaja Chunduru, MD & CEO, Indian Bank: “The tone remains dovish though repo rate change was kept on hold and adding a promise to take steps to boost growth. Continued accommodative stance will boost business confidence further. We can hope that signs of recovery in Q2 and positive growth projected for H2 will improve debt servicing capacity of corporates going ahead.”