MPC begins meet, likely to hold rates
With the second phase of the Covid-19 pandemic impacting consumption and growth, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) is likely to maintain status quo on policy rates, continue with an accommodative policy stance and ensure adequate liquidity in the system in an effort to stimulate growth. The MPC, which is the rate setting panel, began its three-day deliberations on Wednesday and would announce its decision on Friday.
The MPC has kept key policy rates unchanged in the last five bi-monthly policy meets.
The RBI's annual report 2020-2021, released last week, has already made it clear that “the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring that inflation remains within the target”.
The report added that the central bank would ensure that the systemlevel liquidity remains comfortable during 202122, is aligned with the stance of monetary policy, and monetary transmission continues unimpeded while maintaining financial stability. In the assessment of the RBI, the evolving CPI inflation trajectory is likely to be subjected to both upside and downside pressures. The food inflation path will critically depend on the temporal and spatial progress of the south-west monsoon in 2021.
While the country’s GDP growth has sequentially improved, the near-term outlook for the economy remains clouded with extreme uncertainty and downside risks. Since the previous monetary policy review in April 2021, most of the states have announced stringent lockdowns, reflected by a jump in Oxford’s Stringency Index for India from 58 at the start of April to 74 during the month of May.
These restrictions have severely impacted business activities with the contact-intensive sector facing the highest strain while mobility dropped significantly compared with Q3 and Q4 of FY21
M. Govinda Rao, chief economic advisor of Brickwork Ratings, said, “The better-than-expected GDP numbers provide much-needed comfort to the MPC on the growth outlook. However, with the imposition of partial lockdown-like restrictions to contain the virus spread in several parts of the country, the downside risk on growth recovery has intensified. Hence, the RBI is likely to continue with its accommodative monetary policy stance in the decision of the MPC meeting to be announced on June 4 2021.”