RBI may keep policy rates unchanged

Mumbai: The Reserve Bank of India (RBI) is likely to keep interest rates unchanged and reiterate its accommodative stance in this week’s monetary policy review, buoyed by good news on the economic front, said investors and traders. But it could also cite concerns about inflation, which has stubbornly remained above the prescribed target range. The monetary policy committee (MPC) is scheduled to meet on December 2-4.
Bankers will watch out for any guidance on how the RBI plans to manage the record excess liquidity in the financial system, which has distorted market conditions and led to a drop in short-term rates. Some companies are borrowing at rates lower than the RBI benchmark.

“Liquidity is in an excess territory and frankly gone out of hand and could lead to inflation in the future,” said DBS Bank head of treasury Ashish Vaidya. “A part of this is due to the dollar buying by the RBI which has infused cash into the system.”


‘Downside Risks to Growth Remain’
“It will help if they clarify how they are going to restore nomalcy but given the fact that RBI has never addressed its forex strategy, we must not expect anything on that count,” said Vaidya.

In its earlier reviews, RBI has guided that rates will be kept low for much of the next fiscal year. That guidance may be reiterated but with due caution in relation to India’s rising inflation.

The latest data show that India’s retail inflation rose to the highest in more than six years on account of elevated food prices. The consumer price index (CPI) rose to 7.61% in October — the highest since May 2014 and up from 7.27% in September — led by food prices and above the 6% outer band set by law.

However, the central bank has committed to ensure growth and for now will look through the high inflation, the experts told ET.

In his speech at the Foreign Exchange Dealers Association of India annual day last week, RBI governor Shaktikanta Das pointed to demand sustainability and Covid-19 infections that pose downside risks to growth.

“We need to be watchful about the sustainability of demand after festivals and a possible reassessment of market expectations surrounding the vaccine,” Das said. “Even as the growth outlook has improved, downside risks to growth continue due to recent surge in infections in advanced economies and parts of India.”

His comments came just before data showed that India’s GDP contracted 7.5% in the September quarter from the year earlier, marking a rebound from the June quarter’s 23.9% shrinkage. Still, this meant India is officially in recession for the first time since the government started publishing quarterly GDP data in 1996.

‘Food Inflation may Hit Demand’
High inflation will delay further monetary policy easing, said IndusInd Bank chief economist Gaurav Kapur.

“There is a risk of food inflation becoming more generalised and dragging consumption, which the MPC members will be carefully monitoring going forward,” Kapur wrote in a note last week. “Moreover, with growth out-turn better-than-expected, (this) would also provide time for the MPC to see through temporary food price pressures and assess inflationary conditions beyond November, as food prices seasonally witness easing from December onwards on fresh crop arrivals.”

Kapur said any further easing may now only happen in the next fiscal year.

Bankers expect a lower inflation print for November that will ease further in December due to the statistical base effect and softening of food prices.

“We can still expect one more cut of 15 to 20 basis points next quarter if inflation eases closer to 6%. The RBI has done well to manage long-term yields but it is the short term that has fallen sharply,” said Punjab National Bank head of treasury Sanjaya Wasan. “But the central bank may not be too worried about the short tenure since it wants to keep long-term rates low to boost growth.”