Members of the Reserve Bank of India's Monetary Policy Meet have begun their three-day meeting on Wednesday, and are due to announce their policy decision on Friday.
Most analysts are not expecting a rate cut, as in the previous policies. India is facing a unique situation, where there is high inflation and low demand, which typically points to stagflation.
The problem is that both retail and whole sale price inflation has been shooting up. Retail inflation in Oct stood at a robust 7.61 per cent, the highest in six years (since May, 2014), and way above the tolerance levels of the Reserve Bank of India.
On the other hand the economic growth fell by 7.5 per cent in the September quarter of the current fiscal, thanks to the lockdown playing out. Also, with the nation now showing two successive quarters of contraction, the country remains in recession.
On the other hand WPI data coming in also does not point to the possibility of any improvement. "WPI data did not reveal any information that would build the case for a rate cut in December 2020. In our view, the MPC is likely to stay on hold in at least December 2020, if not in February 2021 as well.
In our view the core inflation will continue to record a steady uptick in MoM terms over the next few months, with the strengthening of the economic recovery. Overall, the WPI inflation is expected to remain stable in the next print, before recording base effect related volatility over the rest of this fiscal, " ICRA had said post the release of the WPI data.
Clearly, while there are hopes of economic recovery, we have not seen inflation falling in any way. The general consensus is that the Reserve Bank of India will hold interest rates steady. It's difficult to believe that this would change and we believe that it might be a status quo policy.