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The monetary policy committee (MPC) of the Reserve Bank of India starts its meeting today.
Don’t expect any cut in the policy rate. The repo rate is already pretty low at 4 percent and the banking system is awash with liquidity. That doesn’t seem to have had any perceptible impact on bank credit growth which remains tepid at around 6 percent. If anything, savers are quite miffed because their real return is in negative territory.
Also, MPC members would be furtively eyeing inflation data. Consumer inflation might have eased to 4.29 percent in April, but wholesale inflation hit 10.49 percent. Commodity prices are rising; oil hit $70 a barrel in May. While consumer inflation remains the nominal anchor for monetary policy, the key question is when will this rise in wholesale price inflation show up in the consumer price index?
It all depends on the pricing power of manufacturers. That is unlikely to be high at this juncture as the second wave of the pandemic ebbs slowly and experts warn about the possibility of future bouts of infection. In sum, inflation concerns would likely be dismissed with the use of the word ‘transient’ or its variants.
So what do we expect when Governor Shaktikanta Das addresses the nation on Friday?
Clearly, growth has to be supported. Economists are busy paring growth estimates for this financial year. India is also a two-track economy with big, listed companies doing well, even in the second round of the pandemic, while smaller firms and individuals are facing troubles from loss of life and productivity.
Moreover, unlike the first wave, there are reports of high infection rates in the rural areas as well.
Therefore, the central bank is likely to look at some targeted support measures. On May 5, it had already announced a series of steps such as a liquidity line for small finance banks and a fresh loan restructuring window for small businesses and individuals.
The fresh demands from industry are a loan moratorium and targeted relief measures for sectors such as aviation. But the central bank can only do so much. Flooding the system with liquidity doesn’t solve the problem of risk-aversion among lenders as the poor response to the small finance bank liquidity window showed.
It is up to the government to step up with fiscal support. What that also means is that we can expect the governor to make soothing noises to ensure that bond yields don’t rise. Yields on the benchmark 10-year government bond still hover around 6 percent despite the finance minister saying that the Centre might need to borrow an additional Rs 1.58 lakh crore to compensate the states for shortfall in GST revenue.
At the least, therefore, Das might announce a calendar for the government securities buying programme.
Do check out these investing insights from our research team:
Suryoday corrected a lot post listing – Is it time to buy?
COVID continues to challenge auto industry; medium term outlook encouraging
ITC: What can reverse the underperformance despite its cheap valuation?
IPCA Labs: Strong margins to sustain even post-COVID opportunities
KEI Industries: Aiming to recover in the second half
What else are we reading today?
For ITC’s valuations to improve, its cigarettes business has to light up
Chart of the Day | Indian home price slump worst in the world
Second COVID-19 wave less damaging for Max, Fortis Healthcare
A looming crisis for the dairy sector
Loss-making Paytm's IPO will be a test case for new generation companies
Central Bank Digital Currencies have a role to play in commercial banking, and how!
‘Game over’: Investors hunt for new model after years of broad gains (republished from the FT)
Technical picks : Adani Total Gas, Apollo Hospitals, Muthoot Finance and PI Industries (These are published every trading day before markets open and can be read on the app)