RBI Monetary Policy: What to expect from MPC today

File Photo of RBI Governor Shaktikanta Das

The Reserve Bank of India is set to announce its Monetary Policy Committee (MPC) outcome on October 8. The Central bank began its latest review of the monetary policy on October 6.

The RBI’s MPC meet comes amid easing inflationary pressures and a liquidity flush in the system. Ahead of the announcement by RBI Governor Shaktikanta Das, here is what we can expect:

– Rates likely to remain unchanged: Most economists and watchers feel the MPC is likely to keep rates unchanged, and maintain its ‘accommodative’ stance as it awaits cues on the inflation front. They however expect shift in the forward guidance favouring gradual normalisation.

– Trends in Consumer Price Index: CPI-based inflation has recently eased on the back of lower food prices – coming in at 5.30 percent in August 2021 compared to 5.59 percent in July 2021, as per data from the National Statistical Office (NSO) on September 12, 2021. Expectations for September are around 4.62 percent year-on-year (YoY), with a ‘benign’ view on inflation.

– Likely optimism on growth: The central bank is likely to be optimistic on growth and economic recovery on the back of “faster-than-expected” sectoral improvements. It had projected real GDP growth at 9.5 percent for FY22 in the last policy review, and also projected for Q1FY23 at 17. 2 percent.

– Roadmap on liquidity management: The RBI is likely to map out its liquidity management as core liquidity surplus is steady near Rs 12 lakh crore. Experts feel it may restrict further liquidity infusion and rely on neutral instruments to keep a lid on speculative market actions.

– Previous liquidity measures may continue: Some liquidity support measures such as the special open market operations are likely to get extensions, with minor adjustments, to keep momentum. Expectation is for status quo on rates with narrower guidance going forward.

The purpose of low interest rate policy is to support the real economy, but this has not happened yet, given the large output gaps and the lack of credit offtake, TRUST Mutual Fund CEO Sandeep Bagla told Moneycontrol in an interview. He added that with inflation readings likely at 4-5 percent over the next two months, the RBI does not have a pressing need to guide the markets about normalisation.

Notably, Moody's changed hiked India's sovereign credit rating outlook to stable from negative on October 5, citing an improvement in the financial sector and faster-than expected economic recovery across sectors. "The decision to change the outlook to stable reflects Moody's view that the downside risks from negative feedback between the real economy and financial system are receding," it said.