Home India Finance RBI to hold rates as inflation rises, even in recession

RBI to hold rates as inflation rises, even in recession

RBI to hold rates as inflation rises, even in recession


BENGALURU: The Reserve Bank of India (RBI) will keep rates on hold until early next year in a delicate balancing act between curbing high inflation and lifting the economy from its worst recession on record, a Reuters poll of economists showed.
August inflation, at 6.69%, held above the top end of the RBI’s medium-term target range of 2-6% for the fifth consecutive month amid supply disruptions, while coronavirus infections spread in India at the fastest pace anywhere in the world.
The central bank held its main repo rate at 4% at its meeting last month and said it would keep policy accommodative to support an economy which nosedived 23.9% last quarter, the weakest performance on record.
All 66 respondents expected no change at the September 29-October 1 meeting and the consensus showed rates would remain on hold in December, according to the poll which was conducted over the last few days.
That compared with a quarter-point cut in the fourth quarter predicted a month ago.
The Monetary Policy Committee (MPC) is then forecast to cut its repo rate by 25 basis points to 3.75% in the January-March quarter, holding until at least the end of the next fiscal year.
“The current stagflation conditions are putting the MPC in a difficult position. Disrupted supply chains caused by irregular lockdowns will keep inflation elevated,” said Hugo Erken, head of International economics at Rabobank, referring to a state of persistent inflation but with no growth.
“Given the inflation mandate of the RBI, the risk of high inflation becoming entangled in high inflation expectations and policy credibility, we feel the RBI will keep the status quo.”
The economy, which was already weakening before the pandemic struck, is expected to mark its first full-year contraction since 1979 this year as millions are left unemployed in the world’s second most populous country.
That suggests more support is needed despite $266 billion of announced government stimulus and a cumulative 115 basis points worth of RBI rate cuts since late March.
“While the system is awash with liquidity currently and real interest rates negative, there are no takers for these cheap funds just yet,” said Prakash Sakpal, senior Asia economist at ING Financial Markets.
“Bank lending growth remains on a steady downward path. Therefore, any additional easing isn’t going to be of any use.”
But one-third of economists, or 22 of 65, predicted the RBI will ease again in December, including three who expected a 50 basis point cut.
A further eight of 31 who provided forecasts through early 2022 expect at least one rate hike during that period, underscoring an uncertain outlook for the economy.
When asked to rate the RBI’s response to the pandemic, about 90% of economists, or 49 of 56, said it was about right.


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