Wednesday, Jul 06, 2022

RBI Likely To Maintain Status Quo On Interest Rates: Report

Experts are of the view that against the backdrop of rising inflation, the RBI is likely to keep the key repo rates unchanged


The Reserve Bank of India (RBI) will announce the first monetary policy of the new financial year on Friday amid concerns over rising inflation and as per analysts, it is likely to retain accommodative stance.

Experts are of the view that against the backdrop of rising inflation, the RBI is likely to keep the key repo rates unchanged. 

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.

However, at a time when central banks across the world have increased interest rates from their pandemic lows through multiple rate hikes. 

Russia has had to increase interest rates drastically amid geopolitical tensions. 

The 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.

On Wednesday, the US Federal Reserve policymakers indicated an aggressive approach to fighting rising inflation. They said half-point interest rates hikes “could be appropriate” multiple times this year. 

In the last month’s policy meeting, the Fed had raised the key repo rates by 25 basis points (BPs) for the first time since the beginning of the pandemic and had indicated six more rate hikes coming up in the remaining year. 

In a surprise move, the State Bank of Pakistan (SBP) on Thursday raised its benchmark interest rate by 250 basis points to 12.25%, Bloomberg has reported. The recent hike comes after the Pakistani rupee plunged to an all-time low of Rs 188.18 against the US dollar in the inter-bank market.

According to a statement issued by the central bank; the inflation out-turn in March surprised on the upside, with core inflation in both urban and rural areas also rising significantly.

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.

YS Chakravarti, MD & CEO, Shriram City Union Finance, said, “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.”

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 per cent. The reverse repo rate -- the rate at which the RBI borrows from banks -- is 3.35 per cent.

While a low-inflation regime, like the one being pursued currently, allows the government to keep its interest outgo low, it can also kill demand in the segment of the population that does not depend on loans for its livelihood and survival.

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.

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.

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

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.