RBI Likely To Retain Accommodative Stance, May Leave All Rates Unchanged: Report

Reserve Bank of India (RBI) Governor Shaktikanta Das-led Monetary Policy Committee (MPC) has started its first meeting for the current fiscal year today amid concerns over rising inflation.

Despite spiralling inflation, the Reserve Bank is likely to hold all key rates and retain the accommodative stance at the forthcoming policy review later this week, PTI quoted a Wall Street brokerage.

The Russia-Ukraine war caused quite a lot of upswings in global commodity prices, disrupting several central banks’ monetary policies across the globe. Retail inflation in India for February 2022 has already crossed the Reserve Bank of India’s (RBI’s) comfort limit of 6.1 per cent. Wholesale inflation was 13.1 per cent for the same period.  

But the first policy review meeting of the MPC since the Russian invasion of Ukraine will likely focus on the impact of surging oil prices on revival in consumption demand.

But the central bank will be pushed to revise upwards its CPI inflation forecast factoring in the consumer impact of higher motor-fuel prices that surged globally since the start of the war in Ukraine.

Governor Das recently said that the central bank does not see any risk of the Indian economy going into stagflation currently. However, the RBI will continue to support the economy by ensuring there is adequate liquidity in the system.  

Since his appointment in December 2018, Das’ only role in the country’s monetary policy has been to either bring the interest rates down or maintain the status quo with an accommodative stance.

Since the February meeting, Brent crude has gone up 21 per cent, domestic petrol, diesel pump prices are up 6.5 per cent, domestic LPG cylinder price is up 6 per cent, and commercial LPG is up 12.5 per cent, and edible oils are up around 12 per cent.

Bank of America Securities India in a pre-policy note on Monday said it expects the RBI-MPC to stay on hold on all rates on April 8 and retain its accommodative stance. 

Against this backdrop, the report said the RBI is expected to revise up its FY23 average CPI inflation forecast from 4.5 per cent and sight downside risks to their real GDP growth forecast of 7.8 per cent.

"Considering domestic growth is still in the early stages, the Committee is likely to keep key policy rates unchanged in the upcoming monetary policy meeting. Even though the RBI is reiterating its commitment to supporting growth and easy liquidity, some revisions to inflation and growth forecasts can be expected. The overall growth rate has faced setbacks due to high commodity and input prices and chip shortages. Rising inflation, although transitory and imported, will weigh on the growth in the coming months," said YS Chakravarti, MD & CEO, Shriram City Union Finance.

"The rising input prices and increasing crude and global commodity prices do not hint toward a smooth path and will likely delay spending and hit business and consumer sentiment. RBI needs to continue to support small businesses and MSMEs, which are just starting to emerge from the pandemic-led slowdown. Demand for two-wheeler and retail or personal loans continues to outpace corporate demand, despite being below their pre-pandemic levels, and low-interest rates will help this trend sustain." he added.

The annual inflation rate accelerated for a fifth straight month to 6.07% in February, the highest since June 2021.

Since March 2020, the central bank has cut its key lending rate, or repo rate, by 115 basis points to support the economy in the face of economic fallout from the pandemic.

The RBI last cut its policy rate on May 22, 2020 in an off-policy cycle when COVID-19 posed an unprecedented challenge to the economy.

Since then, the central bank has maintained the repo rate-- the rate at which RBI lends money to commercial banks -- steady at a 19-year low of 4 percent. The reverse repo rate -- the rate at which the RBI borrows from banks -- is 3.35 percent.

Even as Das’ amiable MPC mulls over the complex task of balancing growth with inflationary pressures, it is worth noting that countries across the world are fearing stagflation—a period of high inflation and unemployment rate and low growth. Keeping this in mind, central banks across the world are now steering clear of the easy monetary policy that they had deployed earlier to deal with the pandemic that had killed demand in the global economy.

Last month, the US Federal Reserve announced its first rate hike since the pandemic with an indication of six more coming up in the remaining part of the year.