RBI monetary policy - Views from Mr Mandar Pitale - Head, Treasury, SBM Bank India
The forthcoming Monetary policy committee meeting is scheduled at the backdrop of gloomy economic prospects in near term. Lock down has led to severe disruptions to both demand and supply side factors also resulting in deterioration in consumer confidence and tendency towards risk aversion. This has resulted in a contraction in flow of finance from both banks and non-banks into the economy even after adequate measures from regulator and government helping financial intermediation.
There is a significant likelihood of MPC members voting for a pause during the forthcoming review. Extent of frontloaded easing already carried out (115 bp since FEB plus shift from Repo to Reverse repo as signaling rate ~ 65 bp. Total of 180 bp) and lingering immediate uncertainty about inflation trajectory for next couple of months may weigh the rate decision. The upside inflation surprise suggests that headline inflation is likely to remain near the upper end of the RBI's inflation mandate of 4% plus or minus 2 till September. The drivers impacting the persistent high food inflation such as demand side disruption and extent of good monsoon will be keenly watched by the members as they will have significant impact on inflation numbers softening ahead.
RBI governor in his recent speech has stated that "economy has started showing signs of getting back to normalcy". This also hints that further action will be data dependent. Also, the positive real interest rate logic weighs against an immediate further rate cut based on current inflation trajectory.
As hinted by one of the MPC members in minutes, MPC may preserve some space in future when situation starts returning to normalcy and the fiscal and monetary boost measures start generating impacts to ease further to encourage the growth.
There is still a small probability for a cut in Reverse Repo rate acting as signaling rate at present. Further, we expect another 25 to 35 bp cut spread over the balance three reviews during CY 2020.
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