Mr. Deepak Jasani, Head Retail Research, HDFC Securities expectations from the upcoming RBI Policy.
Since the last MPC meet in June 2020, growth outlook has weakened and inflation pressures have risen mainly due to supply constraints. The RBI seems caught between the devil and the deep sea.
India's average CPI for last two quarters has come in above 6% and even for this quarter it is likely to be above that. The RBI has inflation targeting mandate of 4%+/- 2%. If CPI inflation goes beyond this range for three consecutive quarters, the RBI would be deemed to have missed the target.
A rate cut at this stage would risk CPI remaining above 6% in Sept quarter, This in the face of WPI which stubbornly remains in negative territory.
On the other hand, RBI faces pressure to cut rates to stimulate growth in the present uncertain times due to Covid-19. However give the fact that liquidity in the system is adequate and rate transmission is happening, rate reduction at this point of time may not serve any big purpose especially after 115 bps rate cut since March 2020.
Space for further rate cuts by the RBI is anyway limited as it may be near the end of the rate cutting cycle. RBI would also seek to protect the real returns for savers.
The RBI in its forthcoming meet may focus on unconventional tools to facilitate large Govt borrowings this fiscal. This could include OMOs, raising HTM limits for Banks from the current 20.5% of NDTL and conducting activities like Operation Twist that were conducted recently. This will help soften long term yields.
The RBI could also outside the MPC purview provide a one time restructuring of loans for some of the more stressed sectors.
So we think the RBI may maintain status quo on interest rates at its meet on Aug 06. If at all, a token rate cut of 10-15 bps may satisfy both camps of economists.