RBI likely to maintain status quo on key policy rates

Amid inflation raising its head once again, the Reserve Bank of India is expected to maintain a status quo on the key policy rates in its monetary policy review on Friday and watch how durable are the growth numbers in certain macro-economic segments.

In the last one week, the Goods and Services Tax collection numbers, e-way bill registration and manufacturing sector performance has bounced back to near pre-Covid levels but much will depend on how unscathed remains the economy amidst an impending third wave of the pandemic.

“While the expectation is for a status quo policy, in terms of interest rates and stance, what will be important to gauge is the Monetary Policy Committee’s assessment on the economy and hence, the path forward from here on. Among a host of factors, it is the durability and sustainability of India’s growth curve, in addition to inflation, that will drive its decision making,” said Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank Ltd.

The RBI takes into account the retail inflation while arriving at its monetary policy. It has been mandated by the government to keep the retail inflation at 4% with a margin of 2% on either side.Inflation moved above the upper tolerance threshold in May and June 2021. The sense is that inflation will persist at these elevated levels for some months before easing in the third quarter of 2021-22 when the kharif harvest arrives in markets, a recent RBI article had said.

Experts said market will be keenly watching the RBI’s forward guidance and how it sooths liquidity operations.

“While the MPC meeting is widely expected to be a non-event status quo, market will be keenly watching for forward guidance on future policy normalisation. In particular, any RBI action on fine-tuning banking system liquidity as well as any further steps towards ongoing orderly evolution of yield curve will be the key determinants of interest rates going forward,” said Churchil Bhatt of Kotak Mahindra Life Insurance Company Limited.

Lakshmi Iyer of Kotak Mutual Fund said, “the MPC meets at the cusp of a visibly sticky inflation, nudging growth phase and a fluid pandemic situation world over. The central banker is mostly likely to maintain a status quo on rates being mindful of growth and wait for more data points on inflation front. There could be some steps towards normalisation of liquidity… something which bond markets seem to be anticipating.”

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