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RBI MPC meet: What will take centre stage—inflation or growth concerns?

Headline inflation breached 6 percent in June, which is beyond the comfort level of the RBI tasked with keeping inflation at 4 percent in the medium term.

August 06, 2020 / 08:16 AM IST

The unprecedented disruption caused by the coronavirus pandemic will force the Reserve Bank of India (RBI) to make a tough choice between cutting the rates further to revive the growth and sticking to its job of maintaining the inflation rate.

The central bank’s monetary policy committee (MPC) begins its three-day meeting on August 4 and will come with its decisions on August 6. Its primary job is to keep the inflation rate under control and reviving economic growth is only a secondary objective.

Analysts, experts and economists are divided on MPC's next move. 

There is an urgency to revive the coronavirus-battered economy and demand for one-time loan restructuring is also growing but biting the bullet on a rate cut will not be easy for the central bank. Inflation is higher than expected while rates are already very low though transmission continues to remain a challenge.

Headline inflation breached the 6 percent level in June, which is beyond the comfort level of the RBI tasked with keeping inflation at 4 percent in the medium-term with a 2 percentage point leeway on either side.


Former RBI deputy governor Viral Acharya on August 1 said inflation was higher than expected and the rate-setting panel should "respect" its core mandate of controlling price rise.

"In my view, what the MPC should take seriously is that you have a legal mandate. You are charged with maintaining a headline target rate of 4 percent on Consumer Price Index inflation," Acharya said during a chat hosted by Bhavan's SPJIMR.

 Will growth remain a top priority?

Even though maintaining the inflation rate at 4 percent is RBI's primary task, exceptional situations, like the pandemic, warrant exceptional policy moves.

Major central banks across the globe have taken steps from reducing rates to infusing liquidity to support the economy and keep the sentiment higher.

The RBI, too, has been taking steps to limit the damage caused by the COVID-19 pandemic and subsequent lockdowns.

To provide the much-needed boost to the Indian economy and faced with elevated levels of inflation, MPC has cut the repo rate by a cumulative 155 basis points since February this year.

But the question is for how long can the RBI ignore the rising prices and focus on growth, which is essentially the job of the government.

"This time, MPC decision is likely to be caught between the devil and the deep sea. While the uncertainty on the economic front persists, the Q1 CPI numbers have surprised on the upside. Also, the trends in real rates, the outlook going forward and supply disruption may warrant some caution," said Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company.

"After a 115 bps rate cut, it may not be impossible to envisage a status quo on reverse repo rate though a pleasant surprise is definitely welcome. We do expect the accommodative rate bias to be the undertone of the policy. A dovish pause may bode well for markets as well and the comfortable liquidity could mean stability on bond yields notwithstanding small volatilities along the way," Iyer said.

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank is of the view that having front-loaded the rate cuts and with inflation still above the 6 percent mark, MPC may decide to wait and watch and take a pause in August to monitor India’s progress in its fight against the virus –from a health as well as economic point of view. The MPC could then possibly cut the policy rate by a further 25 bps in the policy meeting at the end of September, which is traditionally India’s busy season.

On the other hand, Barclays said on July 30 that the rise in inflation notwithstanding, the MPC may go in for another rate cut in August to revive the economy.

Impact on the market

Market experts say there is a slight tilt in favour of an “RBI status quo” as the monsoon, so far, has been normal, which augurs well for the rural economy and the sentiment of the market is also positive as Q1 earnings that have not shown any elements of shock.

"The market may not react much if the RBI goes for a status quo because it is not expecting much from the central bank at this juncture. The RBI probably would want to keep space for a rate cut in either the next policy meet or in the next quarter," said G Chokkalingam, Founder and CIO, Equinomics.

Experts say interest rate cuts have had little impact on demand stimulation or growth and the market will be more pleased if the central bank brings in clarity on loan restructuring. A liquidity dose is also something that will give a fillip to the market sentiment.

Of late, liquidity has been one of the most important factors that have kept the market in the higher orbit.

There is a long road ahead for the economy and the market as the impact of coronavirus pandemic will not fade away too soon. The market may focus on the tone of the MPC even as green shoots in the economy, better quarterly earnings and a vaccine for the virus remain top triggers.

Disclaimer: The views and investment tips expressed by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

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Nishant Kumar
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