Reserve Bank of India may not cut key rates in monetary policy review

Amid the intensifying second wave of Covid-19 and with higher fuel prices keeping an upward pressure on retail inflation, the RBI is expected to desist from cutting key interest rates in its monetary policy review on Wednesday.

The two-day monetary policy committee meeting to review rates begins on Monday. The decision will be announced on Wednesday. The RBI had last cut rates on May 22, 2020, in an off-cycle policy review.

A number of macro-economic data points such as industrial production growth, power demand, rail freight, exports and international travel suggest that the pace of economic recovery is at an elevated level.

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However, global fuel prices are expected to keep overall consumer price inflation at a higher level.

Days before the monetary policy, a Moody’s report has said India’s inflation is at an “uncomfortably high” level, which is an exception among Asian economies. In its latest report, it said higher fuel prices will keep upward pressure on retail inflation and keep the RBI from offering further rate cuts.

Retail inflation rose to 5% in February, from 4.1% in January. The Reserve Bank mainly takes into account retail inflation while deciding on the monetary policy. Brent crude has climbed over 26% this year. It was around $30 per barrel in March last year when the pandemic was near its peak.

Under the monetary policy framework, RBI has a target for maintaining retail inflation at 4% (+/- 2%).