Monetary Policy: RBI Likely to Hold Repo Rate Steady

The monetary policy committee (MPC) may stand pat on the policy repo rate as the August 2020 retail inflation reading of 6.69 per cent was above its upper tolerance level of 6 per cent.

This leaves it with little wiggle room to cut the rate further to revive the economy, which is reeling under the impact of the Covid-19 pandemic.

While the GDP contraction of 23.9 per cent in the first quarter is definitely a cause for concern, the MPC has already delivered a cumulative 115 basis points cut (since March 27, 2020 till date) in the policy repo rate to revive the fortunes of the pandemic ravaged economy.

The committee may want the previous two repo rate cuts (from 5.15 per cent to 4.40 per cent on March 27 and from 4.40 per cent to 4 per cent on May 22) to work their way into the lending rates and also keep the powder dry when retail inflation eases.

The six member committee had left the policy repo rate unchanged (the interest rate at which banks draw liquidity from the Reserve Bank of India to overcome short-term mismatches) at its last meeting (from August 4 to 6, 2020).

Uncertainty on inflation-growth outlook

The MPC’s last resolution underscored that given the uncertainty surrounding the inflation outlook and taking into consideration the extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, it is prudent to pause and remain watchful for incoming data as to how the outlook unravels.