India’s Monetary Policy Committee is meeting for the first time this financial year, at a time the second wave of the Covid-19 pandemic threatens to destabilise the country’s economic recovery. The meet also comes days after the government decided to keep the central bank’s inflation target for the next five years unchanged at 4 (+/-2)%.
Stuck between growth risks emerging out of renewed lockdowns and elevated inflation, the policy panel is likely to take the ‘do-nothing’ option this week.
All of the 27 economists polled by Bloomberg expect the MPC to maintain a status quo. The policy repo rate is currently at 4%, while the reverse repo rate is at 3.35%.
Reserve Bank of India Governor Shaktikanta Das is set to announce the policy decision at 10 a.m. today, followed by a press conference at 12 p.m.
What To Watch For?
While the MPC is unlikely to change interest rates, the committee’s guidance will be closely watched.
In the wake of the Covid-19 crisis, the MPC gave explicit time-bound guidance.
“The MPC also decided to continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year – to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward,” the resolution after the February meet said.
With the financial year underway, markets are waiting to see whether the time-bound is extended.
In addition, the MPC’s commentary on downside risks emerging from the second wave of Covid infections is awaited. Economists, however, believe that it is too early for the central bank to review its FY22 growth forecast of 10.5% growth.
Bond markets will also await any further signals of normalisation of monetary and liquidity policies. After the reversal of the 100 basis point cash reserve ratio cut, the RBI may look to raise the reverse repo rate. However, most believe it is too soon for that.