Unprecedented interruption by the coronavirus pandemic The Reserve Bank of India (RBI) will have to make a tough choice. B/W further lowering rates and sticking to a job that will keep the inflation rate at bay.
The Central Bank Monetary Policy Committee (MPC) will begin its three-day meeting on August 4. Comes up with its decisions on August 6. Its primary function is to control the rate of inflation and to revive economic growth.
Analysts, experts, and economists are divided over the MPC’s next move.
The coronavirus-damaged economy needs to be revived and the demand for one-time debt restructuring is also growing. But it is not easy for the central bank to bite the bullet on rate cuts. Inflation is higher than expected, although rates are already very low, while transmission continues to be challenging.
Headline inflation broke the 6 percent level in June, surpassing the RBI’s comfort level. Keeping inflation at 4 percent in the medium term, with a 2 percent left on both sides.
On August 1, former RBI deputy governor Viral Acharya said inflation was higher than expected. And that the rate-determination panel should “respect” its main mandate to control price rises.
“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?
Although maintaining the inflation rate at 4 percent is the RBI’s primary task, exceptional circumstances such as the epidemic require extraordinary policy moves.
Major central banks around the world have taken steps ranging from lowering rates to stimulating liquidity to support the economy and keep sentiment high.
The RBI is also taking steps to limit the damage caused by the Covid-19 pandemic and subsequent lockdowns.
The MPC has cut the repo rate by 155 basis points since February this year to provide the much-needed impetus to the Indian economy and to counter rising inflation.
But the question is how long the RBI can ignore rising prices and focus on growth, which is essentially government work.
“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.
According to Kotak Mahindra Bank, President, Consumer Banking Group, Shanti Ekambaram, the MPC may decide to take a break in August to monitor India as inflation is still above 6 percent, pre-loaded with rate cuts. Progress in its fight against the virus – from a health and economic perspective. The MPC may cut the policy rate by another 25 bps at a policy meeting in late September. Traditionally India’s busiest season.
On the other hand, Barclays MPC may go for another rate cut in August to revive the economy, despite rising inflation on July 30.
Impact on the market
Market experts say that the monsoon has so far been normal and there is a slight inclination towards the “RBI status quo”. It is well suited to the rural economy. The sentiment of the market is also as positive as Q1 earnings. Showed any aspects of the 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 effect on demand stimulus or growth. And the market will be happier if the central bank brings clarity on debt restructuring. Liquidity dose is also a factor that fills market sentiment.
Lately, liquidity is one of the important factors that keep the market in high orbit.
The impact of the coronavirus pandemic does not fade very quickly so there is a long way to go for the economy and the market. Despite being the top triggers for the vaccine. Green shoots, improved quarterly earnings, and the virus in the economy, the market can focus on MPC’s tone.