RBI Monetary Policy meet: MPC decision likely caught between devil and deep sea, says expert

RBI Monetary Policy meet: The Reserve Bank of India’s rate-setting Monetary Policy Committee is set to meet between August 4 and August 6 but another rate cut is unlikely, believe experts. The meet comes at a time when number of coronavirus cases in India continue to rise even as most economic activities have been opened.  

"This time MPC decision is likely to be caught between devil and deep sea. While the uncertainty on the economic front still persists, the Q1 CPI numbers have surprised on the upside. Also the trends in real rates, outlook going forward and supply disruption may warrant some caution,” Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company (KMAMC) said. 

In March this year, MPC had slashed the repo rate by 75 basis points, bringing it down to 4.4 percent from the earlier 5.15 percent. It had further reduced the repo rate by 40 percent to 4 percent in May, while maintaining its accommodative stance.. 

Iyer added that it may not be impossible to envisage a status quo on reverse repo rate (this the current operating rate) – though a pleasant surprise is definitely welcome.  

“We do expect the accommodative rate bias to be the undertone of the policy. A dovish pause may bode well for markets as well and the comfortable liquidity could mean stability on bond yields notwithstanding small volatilities along the way,” she said. 

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The As per the RBI Act 1934, the MPC is required to meet at least four times in a year. For the financial year 2020-21, the committee was scheduled to meet five times-- June 3-5, August 4-6, September 29-30 to October 1, December 2-4 and February 3-5 2021. 

“The interest rates cuts have had little impact on demand stimulation or growth. The COVID-19 pandemic is hurting both businesses and consumers alike and the uncertainty around when things will normalize has led to lacklustre and muted demand and supply disruptions,” Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank said. 

She added that the MPC may decide to wait and watch and take a pause in August to monitor India’s progress in its fight against the virus – both from a health and economic point of view.  

“The MPC could then possibly cut the policy rate by a further 25 bps in the policy meeting at the end of September, which is traditionally India’s busy season,” she added.