The Reserve Bank of India is expected to leave the key policy repo rate unchanged on Friday, once again turning its gaze on growth supportive measures as the second Covid-19 wave is expected to leave a lot of uncertainties on the economic front.
High inflation and upside risk to commodity prices too will leave no room for a rate cut, economists, bankers and brokerages estimate.
The RBI may even lower its economic growth forecast downward for 2021-22 lower than its earlier estimate of 10.5%.
“With the second phase of the pandemic impacting consumption and growth, the MPC will likely maintain status quo on policy rates, continue with an accommodative policy stance and ensure adequate liquidity in the system – all in an effort to stimulate growth. While it will keep one eye on inflation levels on the back of rising global commodity prices, it currently will focus on supporting economic growth," Group President, Consumer Banking, Kotak Mahindra Bank said.
The RBI annual report released last week had said 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 inflation remains within the target.
India's growth prospects have deteriorated since the monetary policy committee of RBI met in early April.
“We expect the RBI to prioritise growth and de-emphasise elevated core inflation in light of the uncertainty on the growth outlook amid the second wave. However, as the pace of vaccination accelerates and core inflation remains elevated (our base case), we expect policy normalisation to come into play starting with a reverse repo rate hike in Q4 and a 50 basis point (bp) repo rate hike in H1-2022,” according to Nomura.
“With the second wave of Covid–19 bringing about new phase of economic uncertainties, we expect RBI to remain growth supportive and leave the policy interest rates unchanged in the upcoming policy. While rise in commodity prices have been exerting an upward pressure on input material cost and on margins, the Central Bank at the current juncture should not risk increasing the borrowing cost,” Shishir Baijal, Chairman & Managing Director, Knight Frank India said.