‘RBI ensures ample liquidity to support growth; rate cuts unlikely as inflation remains sticky’

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December 4, 2020 10:50 PM

Sunil Kumar Sinha, the principal economist at India Ratings said RBI will remain accommodative as long as it is necessary to revive growth on a durable basis.

In its October policy review, RBI had projected retail inflation to be in the range of 5.4-4.5 per cent during October-March period of this fiscal. (Photo source: IE)

The RBI’s decision to keep the key policy rate unchanged ensures a lower interest rate regime and availability of liquidity to support growth under the current economic situation, and a room for further rate cut is negligible owing to high inflation, financial market experts said on Friday.

The Reserve Bank of India (RBI) on Friday left interest rates unchanged for a third straight meeting as inflation stayed stubbornly high, and said the economy was recuperating fast and would return to positive growth in the current quarter itself.

“The policy stance has, as expected continued to focus on reviving growth with the MPC maintaining its accommodative stance. At the same time, the statement reinforces the requirement of supply side actions to break the current inflationary spiral.

“However, not upsetting the status quo probably has been the theme with regards to liquidity management,” said Rajeev Radhakrishnan, Head of Fixed Income, SBI Mutual Fund.

The Monetary Policy Committee (MPC) of RBI expects inflation to remain elevated, barring some transient relief in winter months and this has constrained monetary policy at the current juncture from “using the space available to act in support of growth”, RBI Governor Shaktikanta Das said unveiling the policy review.

At the same time, the signs of recovery are far from being broadbased and are dependent on sustained policy support, he added.

Sunil Kumar Sinha, the principal economist at India Ratings said RBI will remain accommodative as long as it is necessary to revive growth on a durable basis.

“Given the higher inflation forecast, we believe we are in for a long pause on policy rates, even though growth is not broad based yet and need significant policy support,” he said.

Aditi Nayar, Principal Economist, ICRA said the adverse outlook for inflation, the concern that price pressures are spreading, and the strong commentary around monitoring threats to price stability to anchor macroeconomic and financial stability, indicate that the room for further rate cuts is negligible.

She however added that an extended pause will mean that rates will remain low for a long period of time.

Abheek Barua, Chief Economist, HDFC Bank termed as “puzzling” the absence of any major liquidity absorption measures in the midst of a prolonged inflationary episode and upward revision of both growth and inflation forecasts.

“In fact, given its emphasis on growth revival and the suggestion that there is still some more space left for monetary support, another 25-50 basis point cut in 1H CY2021 cannot be ruled out,” he added.

RBI has expected the consumer price based retail (CPI) inflation at 6.8 per cent in the current quarter of this fiscal, which is above its comfortable level of 4 per cent with a bias of plus/minus on the either side.

Rajni Thakur, economist at RBL Bank, said the policy stance is clear that since there are many pockets of pain yet to recover, ‘growth took priority over inflationary overshoot.’

Joseph Thomas, Head of Research – Emkay Wealth Management said the features and contents of the policy give the reassurance that lower rates and the plenty of liquidity will continue for a longer time, till the time inflation rises so much as to derail it.

“The policy is supportive of both equity and fixed income markets, with its moderating implications for rates. That all the liquidity measures initiated earlier will continue to be in force, is a consolation, especially in a high inflation scenario,” he added.

Investment consulting firm Millwood Kane International’s Founder & CEO Nish Bhatt said while the RBI hiking the inflation forecast is a cause of worry, the projection of growth rate swinging back to positive in Q3, Q4 indicates that the worst is over.

In its October policy review, RBI had projected retail inflation to be in the range of 5.4-4.5 per cent during October-March period of this fiscal.

“Today’s policy underscore the priority of supporting growth over near term inflation concerns. While there is little room for policy rates to move in the current situation, this MPC meeting de facto reaffirmed continuation of the liquidity support from the central bank,” said Siddhartha Sanyal, Chief Economist and Head-Research, Bandhan Bank.

RBI has projected India’s GDP to contract by 7.5 per cent in the current fiscal year, as against its earlier projection of 9.5 per cent contraction. Still, growth momentum is markedly weak and needs continued policy support, he added.

Maintaining an accommodative stance under this elevated inflation environment is a risk, but augurs well for the bond market that had started showing signs of tightening especially for NBFCs, said Rajat Bahl, Chief Knowledge Officer, Research Division Brickwork Ratings.

Amar Ambani, Senior President and Head of Research – Institutional Equities, Yes Securities said “Inflation will remain as a hindrance for next two quarters and will dissuade further policy rate cuts at least for FY21.”

“The fact that liquidity remains high, while growth is gaining traction, makes us believe that RBI will adopt a wait and watch approach for next few months.  Nevertheless, the MPC reiterated its accommodative stance given the transitional phase the economy is going through, in terms of recovery from the pandemic,” Ambani said.

Arun Singh, chief economist at Dun & Bradstreet India said as long as core inflation remains sticky owing to cost push pressures, RBI is not likely to reduce the policy rates.

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