MPC may opt for pause in rates

The country's GST collections declined to Rs 87,422 crore in July from Rs 90,917 crore in the previous month. The July collections, however, are higher than Rs 62,009 crore goods and services tax (GST) mopped up in May and Rs 32,294 crore in April. In July 2019, the GST revenue was over Rs 1.02 lakh crore. During the month, GST revenues of all major states were down in the range of 1520 per cent over July 2019.

There is a strong likelihood of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) voting for a pause in rates on August 6, as recent data suggests that the headline inflation may likely remain near the upper end of the RBI’s inflation mandate of 4 per cent plus or minus 2 till September, said economists.

The drivers impacting the persistent high food inflation such as demand side disruption and the extent of good monsoon would be keenly watched by the MPC members as these would have a significant bearing on inflation numbers softening ahead.

So far, to provide the much-needed boost to revive the Indian economy, the MPC has reduced the repo rate by 115 basis points and shifted from repo to reverse repo as the signaling rate. But given the pandemic-induced slack in the economy, a few economists expect the MPC to prioritise growth over inflation and still reduce interest rates further even as the repo rate stands at a historical low of 4 per cent.

Repo rate is the rate at which RBI lends money to commercial banks for short term needs.

The apex bank's MPC headed by governor Shaktikanta Das is scheduled to meet for three days from August 4 to August 6.

The headline Consumer Price Index (CPI) for June 2020 came higher than consensus expectations and was at 6.1 per cent year-on-year, after remaining in 7.2 per cent in April and 6.3 per cent in May. Real rates, which have been a driver of inflation in the past, are moving towards the negative terrain after six long years.

Pranjul Bhandari, chief economist at HSBC Global Research, said, “After cutting rates by 115 bps over two consecutive policy meetings, we think the RBI will pause in the upcoming August 6 meeting. It is also likely to revise up its inflation forecast for the year. Having said that, we expect it to hold on to an accommodative stance and continue to keep domestic liquidity at surplus… We hold on to our forecast of 50 bps further easing in the remainder of the cycle. While this remains our base case, if the sequential momentum in inflation does not decline as rapidly as expected, we could see a more moderate easing of 25 bps.”

Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said, “We believe an August rate cut is unlikely. With the 115 bps reduction in repo beginning February, banks have already transmitted 72 bps to the customers on fresh loans in the interregnum… This has happened because of a proactive RBI using liquidity among others as a tool to serve its policy objective. We believe that the MPC could now well debate what further unconventional policy measures could be resorted to in the current circumstances to ensure financial stability is continued to be addressed.”

DK Joshi, chief economist at Crisil Ltd said, “We believe that growth concerns would still outweigh those on inflation and expect the RBI to cut repo rate by 25 basis points in its August policy.”