RBI begins three-day monetary policy meet; likely to maintain status quo on interest rates

Amid the raging coronavirus pandemic in the country, the Reserve Bank of India’s Monetary Policy Committee (MPC) began its bi-monthly deliberations on August 4. The central bank will announce its monetary policy outcome on Friday, at the end of the meeting. According to PTI, the RBI is likely to maintain the status quo on interest rates and "watch the developing macroeconomic situation for some more time" before taking any decisive action(s) on monetary policy.

The MPC, which is a six-member team headed by RBI governor Shaktikanta Das, is in charge of deciding the key policy rates. The panel had left the rates unchaged last time, citing concerns about inflation. Now, analysts believe that the MPC will again retain the policy interest rates at historical lows due to the fear of the third wave of COVID-19. 

RBI might adopt 'wait and watch' strategy

As per reports, financial experts expect that the RBI will adopt a "wait-and-watch" strategy since it has little elbow room to manoeuvre monetary policies in a world where higher commodity prices and rising global rates following the COVID-19 recovery leave serious implications on production costs. The experts said that the rising inflation in the Indian economy is because of the fuel prices. They added that the pressure will ease out in a while after being normalised. 

Thus, it is expected that the RBI will keep the repo rate at the present level despite high inflation. The Central Bank, which mainly factors in the retail inflation while arriving at its monetary policy, has been mandated by the government to keep Consumer Price Index (CPI) based inflation at 4% with a margin of 2% on either side. Inflation ruled above the tolerance band during June-November 2020 and has again moved above the upper tolerance threshold in May and June 2021, according to PTI. 

A recent RBI article said that they sense that inflation will persist at these elevated levels for some months before easing in the third quarter of 2021-22 when the Kharif harvest arrives in markets. Experts said that growth concerns and weak demand conditions owing to the impact of the second wave of COVID-19 on employment and declining labour force participation rate combined with nervousness of a possible third wave puts constraints on any change in stance by the MPC. it is worth mentioning that the CPI-based retail inflation was 6.26 per cent in June and 6.3 per cent in the previous month. After the June MPC meeting, the RBI had left the benchmark interest rate unchanged at 4 per cent. It was for the sixth time in a row that the MPC maintained the status quo on the interest rate.

(With inputs from PTI)