RBI MPC June 4: Repo rate cut unlikely, accommodative stance may continue; experts say ensure liquidity

RBI may decide to go with the status quo and maintain an accommodative monetary policy, instead of any further rate cuts

The Reserve Bank of India’s Monetary Policy Committee began its bi-monthly deliberations on Wednesday amid expectations of keeping a status quo on repo and reverse repo rates due to uncertainty over the impact of the second COVID-19 wave. The monetary policy outcome will be announced on Friday, June 4, 2021. Analysts expect MPC to keep the policy interest rates unchanged, maintain the accommodative stance and ensure adequate liquidity in the system to stimulate growth. The RBI had kept key interest rates unchanged at the last MPC meeting held in April this year. The repo rate was kept at 4 per cent and the reverse repo rate at 3.35 per cent.

Repo rate to remain unchanged; Inflation may range between 5-5.5%, outlook benign

No change in the repo or reverse repo rate. The accommodative monetary policy stance would be maintained to address economic growth concerns. We have revised our GDP growth to 8.8-8.9% for FY22 based on the statistical effect of a lower decline in growth in FY21. We however believe that RBI is unlikely to revise its GDP growth outlook in the forthcoming policy but may wait for the next one for any revisions and after analysing more data-points. We expect inflation to range between 5-5.5% during the fiscal but the RBI take will be important. It may be revised upwards. The RBI is likely to continue with its open market operations, GSAP and liquidity infusion measures to support credit-off take and anchor bond yields. We believe the RBI will target the 10-year bond at around 6% through its actions.

Govinda Rao, Chief Economic Adviser, Brickwork ratings: Monetary measures are important, but the RBI is unlikely to undertake the heavy lifting that it did last year by further expanding liquidity, for the fear of other adverse macroeconomic consequences. Under the prevailing circumstances, maintaining retail inflation at 4% with a margin of 2% on either side may pose challenges. We expect the economy to register 9% growth in FY22, while the rising Covid-19 infections, particularly in rural areas, pose a downside risk to these growth estimates. In the current situation, we expect that the RBI may likely maintain the status quo and may continue with G-sap auctions to keep the yields on government securities in check. We expect the inflation rate to remain close to the upper bound target of 6% in the near term, and therefore, the MPC may continue to pause on the interest rates by maintaining the accommodative stance to support growth as long as inflation remains within the target range of the monetary policy framework.

Rumki Majumdar, Economist, Deloitte India: RBI may decide to go with the status quo and maintain an accommodative monetary policy, instead of any further rate cuts. One, intermittent lockdowns are resulting in logistics and inventory challenges. At the same time, commodity prices such as iron and steel are at an all-time high and crude oil prices are likely to increase further as global demand recovers and OPEC decides to cut production. All these will increase production costs. Post economic revival, pent-up demand will further result in demand-push inflation. In other words, there are significant upward pressures on prices in the near term. Second, rate cuts have not yet translated into credit growth as the appetite for credit for consumption and investment is low. Uncertainties and anxiety around the infection have led to an increase in precautionary savings, and rate cuts will not incentivise to spend until there is some confidence among consumers about the financial and health outlook. Rather, it may result in reduced earnings for savings and fixed deposit holders and hurt pensioners.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research: Acuité believes that the current focus of the MPC is to support the fragile economy and the financial system from the damage inflicted by the second wave of Covid and to bring it back again on a healthy recovery path over the next few quarters. The latest GDP data released by NSO reinforces the economic revival that was set in motion in Q3 and Q4 of FY21 with the flattening of the first Covid wave; the pickup in industrial activity had led to a 6.9%YoY growth in manufacturing GVA of Q4FY21. Clearly, there is a need to pursue a similar monetary and fiscal policy framework over the next 2-3 quarters as we witness the tapering of the second Covid wave. Therefore, we expect the policy stance to remain unequivocally accommodative throughout the current financial year. While there is virtually no scope for a further cut in interest rates given the increased commodity prices and the rising WPI, the status quo on rates is likely to continue for a longer time possibly till the end of FY22. Despite the risks of a build up of inflationary pressures in the near term, RBI is likely to give higher priority to the concerns around growth recovery.

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank: In the current environment, the choices before the Monetary Policy Committee (MPC) may be limited. With the second phase of the pandemic impacting consumption and growth, the MPC will likely maintain status quo on policy rates, continue with an accommodative policy stance and ensure adequate liquidity in the system – all in an effort to stimulate growth. While it will keep one eye on inflation levels on the back of rising global commodity prices, it currently will focus on supporting economic growth.

Real Estate: Easy credit conditions to promote consumption, investment

Shishir Baijal, Chairman & Managing Director, Knight Frank India: With the second wave of COVID-19 that has brought about a new phase of economic uncertainties, we expect RBI to remain growth supportive and leave the policy interest rates unchanged in the upcoming policy. While rise in commodity prices have been exerting an upward pressure on input material cost and on margins, the Central Bank at the current juncture should not risk increasing the borrowing cost. With the second wave of the pandemic, the economy is in a vulnerable condition and would require further policy support from the Central Bank and the Government. Low interest rate in the economy has been a very strong supportive factor for the bounce back in the housing sector, witnessed before the second wave of COVID 19. When the real estate sector was just about getting back on its feet, it got hit by the uncertainties of the second wave and ensuing lockdowns. The household’s sentiments have been marred deeply by the second wave of the pandemic. Any meaningful revival of the real estate sector would require sustained demand stimulant measures and easy credit conditions to promote consumption and investment in the sector.

Niranjan Hiranandani, National President of NAREDCO: The RBI is expected to maintain its accommodative stance in wake of inflationary pressure and distorted economic growth due to the second Covid wave. The second wave of the Covid-19 pandemic has impacted the economy; there is a need to enhance liquidity in the system, especially for stressed industries.