Inflation ties RBI’s hands; no room for rate cut but need for fiscal stimulus

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Updated: Feb 24, 2020 3:03 PM

The retail inflation has swelled beyond the RBI’s benchmark and the relief is not expected anytime soon.

CPI, retail prices, CPI inflation, cpi at 6 year high, wholesale prices, economic growth, RBI, reserve bank of indiaThe February policy minutes reflected the limitation of further easing even as growth remains a worry.

Despite a weak economic condition, RBI may maintain the status quo on interest rates in the coming months as well. The high inflation has tied the hands of the central bank to further ease the repo rate. “MPC minutes restate high inflation constraining further easing. The February policy minutes reflected the limitation of further easing even as growth remains a worry,” said a report by Kotak Economic Research. The retail inflation has swelled beyond the RBI’s benchmark and the relief is not expected anytime soon. With CPI inflation likely to remain above the RBI’s upper tolerance band of 6 per cent in the coming months, the Kotak report expects the MPC to keep the interest rates unchanged in the first half of this calendar year.

On the back of a major economic slowdown, the central bank cut the interest rates five times in a row in 2019. Repo rate dropped by 135 points to 5.15 per cent in the last year. The move was aimed to provide cushion to the sagging economy, which was under the pressure of low demand and consumption. However, when the market was expecting another cut in the December MPC, the central bank took everyone by surprise by maintaining the status quo on rates, citing a wait-and-watch approach.

Also Read | Slowdown effect: Govt spending on poor slows as economy trends down

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Meanwhile, in the latest MPC meet, most of the members saw the inflation trajectory easing over the next few months as vegetable prices moderate but they remained uncertain on the trajectory as food inflation is becoming broad-based. One of the members also said that there is no room for further rate cuts, but incoming data will remain crucial. On the growth front, members remained concerned, although acknowledging the recently mixed data prints suggesting tentative signs of a turnaround.

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