Will RBI increase interest rate in first monetary policy of current fiscal? What experts say
The Reserve Bank of India's rate-setting panel on Wednesday started discussions to firm up the next bi-monthly monetary policy amid expectations that it might retain status quo on interest rate but change its monetary policy stance amid rising inflation on account of geopolitical developments.
The Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, is holding its first meeting in the current financial year. The meeting will be on from April 6 to 8 and the outcome will be announced on April 8.
In the last 10 meetings, the MPC left interest rate unchanged and also maintained an accommodative monetary policy stance. The repo rate or the short-term lending rate was last cut on May 22, 2020. Since then, the rate remains at a historic low of 4 per cent.
In a report this week, State Bank of India (SBI) said the central bank may increase its inflation projections for fiscal 2022-23 considerably and also lower growth projections. It expects the RBI to continue with a pause on short-term lending rate (repo).
"Prolonged growth supportive stance may have created a signal extraction and coordination problem with administered rates being cut even as inflation has continued to tread up," SBI said in the report.
According to the report, real rates have been negative for a persistent period and "the RBI may like to create a discordant note by emphasising inflation as a threat but at the same time emphasising it is fully seized of it!"
"We don't expect any change in policy rates. Liquidity conditions may change as a result of subsequent actions which may change the operative rate. Higher inflation is largely because of supply-side issues which cannot be addressed through higher rates. While persistent inflation can become systemic, I think we still have some time before we get there," Rajiv Shastri, Director and CEO, NJ Mutual Fund, said.
Industry body PHD Chamber's President Pradeep Multani on Wednesday said the economy is still in the recovery process from the daunting impact caused by the coronavirus pandemic and that an accommodative policy stance at this juncture would be inevitable to strengthen the economic fundamentals.
"The recent geopolitical developments though stoke inflation, status quo of the policy rates will help the economy to cope up the impact of external shocks," he said.
"Since the last policy, a hawkish Fed and the war in Europe have significantly increased the upside risk to inflation. Crude at the north of $100, will not only disturb the inflation expectations but also impact the deficit estimations. However, the commentary from both the GOI and MPC members in the interim has been more towards assuaging the fears due to the spike in crude and maintaining the focus on supporting growth. Expect the MPC to maintain status quo while revising upwards the inflation expectations, arising from a volatile global environment, rising commodity prices, and supply chain disruptions due to the war," Anand Nevatia, Fund Manager, TRUST Mutual Fund, said.
The ongoing Russia-Ukraine conflict and surging oil prices are pushing the cost of commodities higher, resulting in rising inflationary trends.
The government has mandated the central bank to keep inflation at 4 per cent, with an upper and lower tolerance level of 2 per cent.
After the February MPC meeting, the RBI had decided to hold its key lending rates steady at record low levels for the 10th straight meeting to support a durable recovery of the economy.
With PTI Inputs
