How Covid-19 disruptions and food inflation have worsened RBI's trilemma

Four things to watch out for from today’s RBI policy

Rbi

By Administrator_India

Capital Sands 

MUMBAI: The Reserve Bank of India Governor Shaktikanta Das will announce the policy decision of the Monetary policy committee on Friday at 10 am. This is the first meeting of the new MPC which was formed after the appointment of three external members – Jayant Verma, Ashima Goyal and Shashanka Bhide. Here are the 4 things to watch out for.

Rate Action: The MPC is likely to ensure continuity of policy by announcing a status quo policy after three days of deliberation. A Mint survey had showed that 10 eminent economists were unanimous in their view that curbing inflation, currently hovering above 6%, remains the primary concern of the MPC. A Bloomberg Poll of 32 economists showed that 30 expected a status quo while two expected a 15 and a 50 basis points cut each. Six respondents said MPC will cut rates by 25-50 basis points before the end of March as growth concerns will likely persist. A basis point is a hundredth of a percentage point. Several respondents said the timing of the next rate cut could well be pushed to the next fiscal unless inflation eases.

MPC Voting Pattern: The newly inducted members are supposed to have lent a dovish tilt to the MPC. Among the three, the views of Goyal and Verma are well known and are seen to be dovish. Both have supported unconventional monetary policy and criticised hawkish policies that overemphasise the importance of high inflation. Bhide comes from a think tank and has worked on real economy issues, but his policy views are not yet known. The views of the remaining members from RBI are well known with Governor Shaktikanta Das leaning towards a dovish stance, executive director Mirdul Saggar taking a more neutral stance and deputy governor Michael Patra being the only hawk.

Forecasts: Economists are also expecting RBI to provide inflation and growth projections for the first time since the February 2020 meeting. This will lay out the RBI’s assessment of the extent of the current slowdown and the medium-term implications of current crisis. The consumer price inflation (CPI) for the month of August stood at 6.69%, above the top end of the RBI’s medium-term target range of 2-6% for the fifth consecutive month amid supply disruptions. Economists also expect RBI’s recent remarks about using the exchange rate as a tool to fight imported inflation. Although inflation in India’s import basket remains high due to high fuel taxes, we do not see much scope for this trend to continue. RBI could also provide growth estimates in the policy following the release of the April-June 2020 GDP data which showed a near 24% contraction in real GDP.

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