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RBI Oct'20 Meeting Preview - MPC likely to maintain status quo
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The Reserve Bank of India is holding its delayed policy meeting for 3 days, beginning from today after the government belatedly appointed new members economists Ashima Goyal, Jayanth R Varma and Shashanka Bhide to the interest rate-setting committee. The Monetary Policy Committee will take its decision on October 9, more than a week later than originally planned.

Inflation constrains RBI

With Covid-19 dealing a crippling blow to the economy and an already weak financial sector reeling, India is looking out for easier monetary policy. Retail inflation has been above the upper band of the RBI’s inflation target for five consecutive months, breaching tolerance mark of 4-6% which was supposed to be maintained until March 31, 2021. Although modest reduction in July and August CPI inflation has provided some comfort to the RBI. However, consistent supply-side price shocks both on food and non-food segments and higher administrative costs have added upside bias to the inflation trajectory.

New MPC composition to bring a wider perspective

All three new members have been from diverse field of academics which could bring a wider perspective to the monetary policy space. The tilt of the newly appointed members is seen as dovish compared to the past external members. It strengthens the view that policy guidance will be accommodative.

Growth concerns

With the virus spread and continuing extended versions of semi-lockdowns, growth prospects have continued to dim. Current growth cycle could have serious implications for India’s potential growth, if not addressed sufficiently. Thus we feel in October policy the MPC will continue to remain accommodative on stance and will hint at further policy support and scope for cuts in coming months.

According to Care Ratings, The RBI is likely to ensure surplus liquidity in the banking system primarily via open market operations and special OMOs with a dual objective of improving financial conditions and managing the yield curve.

The RBI has cut interest rates by 115 basis points since February and pumped in billions of dollars of liquidity into the financial system. Keeping in mind the growth trajectory we feel new external members are likely to keep the continuity of policy tone set by the previous MPC going with no change in the repo and reverse repo rates this time.

 

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