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RBI's MPC may maintain status quo due to high inflation, but revise economic growth forecast upwards

Also, the status quo expected for December policy may continue for the next meeting and there could be a further update on inflation trajectory for coming quarters, experts feel.

December 03, 2020 / 08:17 AM IST

The Monetary Policy Committee started off its three-day meeting on December 2 and the final outcome of the fourth bi-monthly monetary policy will be released on December 4.

Experts largely expect the status quo on the repo rate at 4 percent as inflation reading is still above RBI's target of 4 percent (+/- 2 percent). Also, the status quo expected for December policy may continue for the next meeting and there could be a further update on inflation trajectory for coming quarters, experts feel.

"With frequency indicators and GDP data conveying meaningful rebound in economic activity and retail inflation remaining stubbornly high, we not only expect the RBI to maintain status quo in December 2020 policy meeting, but the minimal chance of a 25bps rate cut in February 2021 also appears to be fading away," Amar Ambani, Senior President & Institutional Research Head at Yes Securities said.

Rajeev Srivastava, Chief Business Officer at Reliance Securities also told Moneycontrol that they expect a status-quo on interest rates and MPC will hold their accommodative stance in the coming RBI policy.

"As consumer inflation is at the higher end, the commentary will be important which can impact the markets depending upon the announcements," he said.

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CPI inflation has remained above 6 percent mark this year, except in March.

Retail inflation in October at 7.61 percent was at a 77-month high due to consistent increase in several segments, against 7.27 percent reported in September month. The inflation based on the Consumer Price Index (CPI) was 4.62 percent for the same period a year ago.

Core inflation (excluding food and fuel) stood at 5.7 percent for October, the highest level in 2 years, against 5.54 percent in September.

"RBI will also update on the inflation trajectory when compared with the earlier expectations of CPI moderating in Q4 FY21," Amar Ambani said.

Experts largely expect the RBI to revise its economic growth forecast upwards given the further improvement in Q2 FY21 with the rising economic activity across India, though the COVID-19 is yet to control fully.

"We will likely see RBI upgrade its growth outlook, wherein the Central bank will scale down on its earlier pessimistic GDP projection of -9.5 percent for FY21," Amar Ambani said.

GDP reading for the quarter ended September 2020 came in at -7.5 percent (driven by manufacturing, agriculture and electricity), which is far better than the contraction of -24 percent seen in June quarter hit by the lockdown. This is also an indication of improving economic activities across the country.

More surprise thing was manufacturing and electricity, which both turned positive in Q2 FY21 compared to a big contraction in the previous quarter.

As a result, experts feel the second half could be strong in terms of recovery with the hope that Q4 FY21 numbers are likely to be positive. They see 7-10 percent growth in FY22 largely on the low base of FY21.

"GDP growth although expected to improve in the remaining two quarters of 2020-21 with the improved pace of pickup in economic activity across most sectors faces downward pressured from the sustained spread of the pandemic in the country and the re-imposition of restrictions in various regions," CARE Rating said.

"Given the economic uncertainties consumption demand and investments are not unexpected to see a noteworthy pickup in the coming months, we expect the country's GDP to contract by -7.7 percent to -7.9 percent in FY21," the rating agency added.

The street will also look for some measures, if any, from the RBI, to revive economy further, though it is highly unlikely.

"RBI along with the Government has been taking comprehensive steps to stimulate and revive the ailing economy from the onslaught of the COVID 19 pandemic. It will be quite sometime before the vaccine for the pandemic is out for the common public and curbing of COVID 19, therefore, RBI may not bring back a contradictory regime for a couple of quarters," Gaurav Garg, Head of Research at CapitalVia Global Research told Moneycontrol.

Amar Ambani of Yes Securities believes that the MPC may not do much on the non-interest rate tools, as significant measures (OMOs, TLTROs) have already been unleashed during the last policy meeting.

"The fact that liquidity remains high, while growth is gaining traction, makes us feel that RBI will adopt a wait-and-watch approach for next few months," he said.

Lakshmi Iyer, President and Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company said the discussion points for the RBI policy meeting could be -- what should a central banker do when one is seeing rising yet likely-to-cool-off inflation? When you see a good Q2 GDP growth data, yet uncertainty exists with respect to coming quarters. When you need liquidity to provide credit to the real sector, yet grapple with not so high credit offtake.

"Focus could be on how much is the desired liquidity to ensure optimum balance between rates and monetary transmission," she added.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Dec 3, 2020 08:17 am

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