Negative real rates in India and the recovery in growth coupled with high inflation suggest that its central bank has little room for more monetary stimulus, but policy is likely to remain flexible, economists and analysts said.
Industrial production in September grew for the first time in six months, while green shoots are also visible in increased collection of taxes on goods and services, higher energy consumption and a rebound in the purchasing managers index, among other indicators.
With inflation hovering above 7% in October for the second month in a row, well above the RBI’s MTS of 4%, views that India is near the end of the current cycle of rate cuts have become more pronounced.
“The inflation rate has been consistently ahead of not only its target rate, but also the upper limit of its target range. Ideally, he should be looking at rate hikes right now, ”said Sameer Narang, chief economist at Bank of Baroda.
Although the central bank cannot raise rates due to the impact of the Covid-19 pandemic on economic activity, it would still be aware of the long-term impact of negative real interest rates on the economy, economists believe.
High inflation is a risk the RBI cannot afford to ignore, Nomura’s economists wrote in a note.
The RBI said Wednesday that the outlook for economic recovery has improved, a comment interpreted by some analysts that the bank may not need to do much more to boost growth.
If the recovery continues over the next few months, the RBI said it expects the economy to emerge from the contraction seen in the first two quarters and return to positive growth in the December quarter.
Rating agency Moody’s on Thursday revised its growth forecast for 2020/21 to a contraction of 8.9% from its previous forecast of 9.6%, citing the steady decline in new and active Covid-19 cases since September. .
But Covid-19 is widely viewed as the group’s prankster by most analysts.
They said the central bank would help banks and businesses lower borrowing costs unless a second wave of infections forces it to provide more direct support through rate cuts.
Daily coronavirus infections in India are less than half their peak reached in September, but the economy is still recovering from radical lockdowns to control the spread of the pandemic.
Since March, the RBI has cut the buyback rate by 115 basis points to cushion the impact of the crisis.
“Given the fragile state of the economy, the RBI is likely to continue its accommodative stance for an extended period,” said Sujan Hajra, chief economist at Anand Rathi Securities.
.
