The Economic Times daily newspaper is available online now.

    With 3 new members in MPC, what to expect in RBI money policy on Oct 1

    Synopsis

    The central bank is likely to keep its accommodative stance intact and would ensure enough liquidity in the system through various measures.

    RBIAgencies
    The US Fed, in fact, relaxed its inflation-setting target in its recent policy review to give growth a chance in the world's largest economy.
    NEW DELHI: RBI money policy review next week will be crucial. The policy review has come at a time when central banks globally are suggesting the need for more stimulus to help slowing economies. The US Fed, in fact, relaxed its inflation-setting target in its recent policy review to give growth a chance in the world's largest economy.

    But what works in the US might not work everywhere, said economists who said despite three new faces joining RBI’s Monetary Policy Committee (MPC) next week, the Indian central bank is likely to give rate cut a miss in its October 1 policy review, thanks to sticky inflation that has been ruling above the 6 per cent comfort zone for some time now. RBI will also not give in to demands for relaxing inflation target, they said.

    However, the central bank is likely to keep its accommodative stance intact and would ensure enough liquidity in the system through various measures.

    The MPC policy review would take place on September 29, 30 and October 1.

    Here's what to expect from MPC's forthcoming policy:
    Not rate cut: ‘Accommodative’ stance to continue
    Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank, said elevated inflation may push RBI to maintain status quo in the upcoming policy. “Constrained by the inflation mandate, unless durable reduction in inflation is visible, we see limited room for policy actions. Additional monetary easing will remain entirely a function of how the growth-inflation trajectory evolves in the months ahead. RBI would continue to emphasize its accommodative stance and keep doing tweaks to liquidity and regulatory operations to keep financial market conditions benign,” Bhardwaj said.

    New external members: Inflation stance likely unchanged
    The six-member monetary policy committee comprises three members from the central bank and three external members appointed by the government. The three new external members will likely join the MPC next week. Foreign brokerage Barclays said the appointments are unlikely to change the broad direction of policymaking.

    “With the imminent reshuffle in India's monetary policy committee, domestic demand has emerged to relax the 4 per cent inflation target and also for the MPC to be more supportive of growth. We reiterate our argument that Indian authorities must not take cues from US policies, because of the massive differences between the two economies. There is no need to relax India's inflation target," Motilal Oswal said in a note.

    The brokerage said retirement fund body EPFO earlier this month decided that the interest payable to subscribers for FY20 would be paid in two installments. “This is one of the direct adverse impacts of an easy monetary policy for a longer period, which will play out with a considerable lag across the world. However, if and when it hits, the consequences could be dire," it said.

    First-time GDP projection since Feb
    Barclays expects RBI to finally provide economic projections for the first time since the February 2020 meeting. Data projections from the central bank will be critical, it said, as it would lay out RBI’s assessment of the extent of the current slowdown and the medium-term implications of the current crisis.

    “Given that the Reserve Bank of India Act requires it to publish its forecasts every six months, RBI’s projections – however uncertain – will likely be published in the October Monetary Policy Statement," the brokerage said.

    Exchange rate to fight inflation
    Barclays says it awaits clarity on RBI’s recent remarks about using the exchange rate as a tool to fight imported inflation. Although inflation in India’s import basket remains high due to higher gold prices and increases in fuel taxes, the brokerage does not see much scope for that trend to continue, especially since the government continues to exercise significant discretion on the pass-through of fuel costs, and the cost of crude is a much smaller component in retail fuel prices.

    Updates on inflation expectations
    Meanwhile, RBI's update on its inflation expectations will be noteworthy. CPI inflation for August stood at 6.69 per cent, which was lower than July's 6.73 per cent. CPI inflation continues to remain stubbornly more than 6 per cent, the upper end of RBI’s tolerance range.

    Economists noted that even as high inflation numbers could be partly explained by the high food inflation of 9.05 per cent, the miscellaneous component of the CPI, which accounts for 27.3 per cent weight, also came in high at 6.99 per cent for July. Even as there are hopes of CPI inflation numbers subsiding due a fall in food inflation on bumper Kharif crop, the core inflation is something which may keep the RBI worried.




    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in