High prices, labour shortages, elevated logistics costs, and high tax burdens remain factors driving costs higher in the economy.
RBI had effectively used forward guidance to manage expectations in the October 2020 policy.
RBI MPC meeting: Reserve Bank of India may not cut the repo rate in the upcoming Monetary Policy Committee meeting this week; however, it may raise the inflation and growth forecasts. High prices, labour shortages, elevated logistics costs, and high tax burdens remain factors driving costs higher in the economy, said a report by Barclays. While the phased unlocking of the economy continues to ease supply chain disruptions and facilitate broader labour mobility, fiscal constraints will likely keep the tax burden from easing materially, the report added. Further hike on motor fuel could also make RBI raise the inflation targets.
On the other hand, the growth recovery has been slightly faster than the RBI’s earlier forecasts, which may make the central bank go for a growth rate revision as well. Nevertheless, RBI Governor Shaktikanta Das had last week said that even as the growth outlook has improved, downside risks to growth continue due to the recent surge in infections in advanced economies and parts of India. He had added that India needs to be watchful about the sustainability of demand after festivals, and a possible reassessment of market expectations surrounding the vaccine.
From July 2019 to August 2020, the RBI has cut its policy rate by a cumulative 250 basis points. Consequently, the transmission of policy repo rate changes to deposit and lending rates of scheduled commercial banks has improved, reflecting the combined impact of liquidity surplus, the accommodative monetary policy stance, the introduction of external benchmark-based pricing of loans, weak credit demand conditions, and lagged impact of policy rate cuts, RBI said in its November bulletin.
Further, nurturing growth will remain central to monetary policy and the RBI is likely to repeat the guidance provided in the October policy review while maintaining the status quo on policy rates, the Barclays report underlined. The accommodative stance is also likely to be continued as suggested by the RBI itself. Shaktikanta Das, last week, said that the monetary policy guidance in October emphasised the need to see through temporary inflation pressures and also maintain the accommodative stance at least during the current financial year and into the next financial year.