RBI likely to retain key lending rates

Persistently high inflation fanned in part due to supply side disruptions along with seasonal factors will deter the Reserve Bank to administer a dose of lending rate cut during the upcoming monetary policy review.

In a poll conducted by IANS, economist and industry experts cited elevated inflation level as a key determinant for a pause in policy easing. Notably, the expected move comes at a time when industrial output is at historic low due to the Covid-19 pandemic. A policy easing, if administered, would have theoretically allowed commercial banks to reduce their lending rates thereby helping both consumers and the industry to get cheaper finance.

Subsequently, the increased money flow in the hands of consumers would have helped to boost demand, and for the industry provided a higher flow of capital investment on the back of lower cost. Nonetheless, retail inflation has been at an elevated level during July-August.

"In view of the retail inflation being higher than RBI's comfort zone for two consecutive quarters in the past and likelihood of it remaining in excess of 6 per cent in July-September as well, no rate cut is expected in the upcoming policy review," said Sunil Kumar Sinha, Principal Economist, India Ratings & Research.

"But RBI will continue to maintain its accommodative policy stance to signal that policy rates are not going to go up either." Lately, data showed that India's August retail inflation stood at an elevated level. The retail or consumer price index stood at 6.69 per cent in August. It had risen to 6.73 per cent in July.

As per the data, retail inflation level has reached the upper limit of the medium-term CPI inflation target of 4 per cent. The target is set within a band of +/- 2 per cent. "Given the elevated CPI inflation, we expect an extended pause from the MPC," said Aditi Nayar, Principal Economist, ICRA.

The RBI's MPC (Monetary Policy Committee) is expected to release its resolution on the monetary policy after their meet from September 29 to October 1, 2020. "We believe that MPC will continue to hold the interest rates in the near term given the continuing inflationary concerns," said Suman Chowdhury Chief Analytical Officer at Acuite Ratings and Research.

However, the accommodative stance is likely to persist in the face of the ongoing economic contraction.

Besides inflation, other economic indicators, showed decline in production and in essence revival of economic growth due to localised lockdowns, supply chain disruptions and lack of labour supply.

"Our inflation trajectory suggests that technically the next opportune time to cut may not come before end-3QFY21," said Madhavi Arora, Lead Economist, FX and Rates for Edelweiss Securities.

"However, the modest reduction in July and August CPI inflation will provide some comfort for the RBI. We maintain the depth of ongoing fall in demand is not yet reflected accurately in inflation, and as it starts to percolate in data and as supply normalise progressively, headline CPI inflation will likely moderate towards 4 per cent by end-CY20, admittedly also helped by base effect."

The August datapoint further showed that India's consumer food price index had eased a bit to 9.05 per cent against 9.27 per cent reported for July 2020. On its part, Brickwork Ratings said: "We expect inflation to remain below 6 per cent in Q3FY21 as food inflation is likely to lower in the wake of abundant harvests."

"The pandemic is still evolving, and credit offtake, even at a low rate of interest, looks sticky. With uncertainty regarding the pandemic loom ing large, the RBI may not provide a GDP forecast for FY21 in the upcoming MPC meeting. As in the previous statements, the RBI may continue to talk about economic contraction without quantifying the magnitude."

Last month, the MPC of the central bank decided to retain its key short-term lending rate to curb the rise in inflation, and stabilise the general economic environment.

Even though it retained the repo rate -- or short-term lending rate for commercial banks, at 4 per cent, the MPC agreed to maintain the growth-oriented accommodative stance. Likewise, the reverse repo rate stood unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the 'Bank Rate' at 4.25 per cent.