MUMBAI: The Governor of the Reserve Bank of India, Shaktikanta Das, will announce the policy decision of the monetary policy committee on Thursday at 10 am. This is the first meeting of the new MPC that was formed after the appointment of three external members: Jayant Verma, Ashima Goyal and Shashanka Bhide. Here are the 4 things to keep in mind.
Action rate: The MPC is likely to ensure policy continuity by announcing a standstill policy after three days of deliberation. A Mint survey had shown that ten eminent economists were unanimous in their view that curbing inflation, which currently stands above 6%, remains the MPC’s main concern. A Bloomberg poll of 32 economists showed 30 expected a status quo, while two expected a cut of 15 and 50 basis points each. Six respondents said MPC will cut rates 25 to 50 basis points before the end of March as concerns about growth are likely to persist. A basis point is one hundredth of a percentage point. Several of those surveyed said the timing of the next rate cut could carry over to the next fiscal year unless inflation slows.
MPC Voting Pattern: Newly incorporated members are supposed to have lent a moderate bow to the MPC. Among the three, the opinions of Goyal and Verma are well known and considered moderate. Both have supported unconventional monetary policy and criticized hardline policies that exaggerate the importance of high inflation. Bhide comes from a group of experts and has worked on real economy issues, but his views on policies are not yet known. The views of the remaining RBI members are well known: Governor Shaktikanta Das leans toward a moderate stance, CEO Mirdul Saggar takes a more neutral stance, and Lieutenant Governor Michael Patra is the only hawk.
Forecasts: Economists also expect the RBI to provide inflation and growth projections for the first time since the February 2020 meeting. This will expose the RBI’s assessment of the extent of the current slowdown and the medium-term implications of the current crisis. Consumer price inflation (CPI) for the month of August stood at 6.69%, above the upper limit of the RBI’s medium-term target range of 2-6% for the fifth consecutive month amid disruptions in the supply. Economists are also looking forward to recent comments from the RBI on using the exchange rate as a tool to combat imported inflation. Although inflation in India’s import basket remains high due to high taxes on fuels, we don’t see much room for this trend to continue. The RBI could also provide estimates of growth in policy after the release of GDP data from April to June 2020, which showed a contraction of close to 24% in real GDP.
Liquidity: The market is awaiting the RBI’s views on the banking system’s large surplus liquidity and its plan to maintain contained bond yields through OMO (open market operations) or other Operation Twist. In recent months, the RBI had refused to take bids at a government bond auction for the fourth time in seven weeks as it struggles to cool benchmark yields that have crossed 6%. Therefore, the market expects the RBI to provide a clear framework on the size and duration of quantitative programs that would support government loans. This would help reduce the uncertainty that has led to a bullish bias in bond yields despite the excess liquidity.
.
