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RBI Expected To Keep Rates Unchanged Even As Economy May Have Entered Recession

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Most experts are expecting the Reserve Bank of India (RBI) to keep key policy rates unchanged at its next monetary policy meeting scheduled for next week, given the high rate of inflation, even as the economy is expected to have entered a technical recession in September ended quarter.

 

RBI Expected To Keep Rates Unchanged Even As Economy May Have Entered Recession

Recession looming

Two consecutive quarters of contraction in GDP (gross domestic product) growth is technically considered a recession. In a monthly bulletin article, an RBI official recently has said that India's GDP has likely contracted by 8.6 percent in the July-September period.

While official data is not out yet, for the April-June quarter, India's GDP contracted by a sharp 23.9 percent. This means that if the economy has contracted in September ended quarter, India will have entered into a recession for the first time in history.

To support growth an central bank ideally cuts rates to increase liquidity in the economy. Since the COVID-19 outbreak, RBI has cut repo rates by 1.15% in total, taking the cumulative easing in lending rates since 2019 to a significant 2.50%. This would mean that the central bank will maintain its focus on controlling inflation.

Experts see inflation as a bigger concern

RBI's mandated inflation target for the year is to maintain inflation within the 2 to 6% band. However, in October retail inflation (measured by consumer price index) rose to 7.61%. More importantly, it is not a one-month event; inflation has been above 6% every month this year except for March.

"Though the rise in retail inflation is mainly on account food prices, core inflation, which measures industrial and retail non-food goods, has also gone up to 5.47 per cent and may remain stubborn, given that drivers like energy and transport costs are likely to go up in the future," an unnamed senior government official was quoted in a New Indian Express article saying.

 

"We expect the Reserve Bank of India's (RBI) monetary policy committee to keep rates steady next week, even though we expect its inflation and growth forecasts to be revised higher," Barclays said in its research report on emerging markets.

It further said that the actions announced by the central bank in its October MPC meeting have achieved some success in keeping borrowing costs low across the public and private sector, as well as reducing risk but these policies will be needed for longer to enhance credit flows in the economy.

As such, with the economy remaining on the path to a gradual recovery and facing sticky supply-side price pressures, we expect the RBI to stay on hold, maintain an accommodative stance, and continue to emphasise that a durable improvement in growth is needed before it would re-look at policy settings, the report said.

Morgan Stanley had similar views and said that it expects headline inflation to decelerate only next year.

"We expect RBI to keep rates on hold as it continues to maintain its accommodative stance. This is on the back of a sticky inflation trend and sustained recovery across high-frequency data which is in line with our expectation of positive economic growth from QE Dec," it said in its report on Thursday.

"While headline inflation has been trailing above the upper threshold of the 2-6% range for seven consecutive months, it is expected to decelerate next year, albeit remaining marginally above the 4% target," the report added.

Read more about: rbi inflation monetary policy
Story first published: Thursday, November 26, 2020, 16:25 [IST]
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