India’s GDP in the second quarter contracted by 7.5 per cent, solidifying hopes of early economic recovery. But inflation continues to remain persistently high. All eyes are now on RBI’s policy review on Friday.
Experts believe that the RBI will prefer holding rates ahead of Friday’s policy review announcement. (Photo: Reuters)
The Reserve Bank of India’s Monetary Policy Committee (MPC) will announce its rate review decision on Friday after data released last week showed that the economy contracted much lesser than expected.
India’s GDP in the second quarter contracted by 7.5 per cent, solidifying hopes of early economic recovery. While GDP contraction has softened during the July-September quarter, inflation continues to remain persistently high.
According to news agency Reuters, economists and market participants will be closely watching the RBI’s commentary around liquidity as overnight call money rate has fallen below the reverse repo rate on days due to excess liquidity in the banking system.
Radhika Rao, an economist with DBS Bank, told Reuters that the MPC’s view of liquidity will be more important this time as the transient surplus has pushed down short-term overnight rates sharply.
Economists also expect the BRI to announce measures that will help in tweaking market rates through liquidity absorption operations or by giving increased access to the reverse repo window to more market participants.
Will RBI go for a rate cut?
Over 50 analysts polls by Reuters ahead of GDP data released last Friday said they did not expect the central bank to change rates.
The economists also said that the next rate could take some time as the central bank has already cut the repo rate by a total of 115 bps this year to a record low of 4 per cent. The economists now expect the next rate cut to in the April-June quarter of 2021-22. Earlier, they predicted a rate cut in the January-March period.
A key reason why economists think that the rate cut could be delayed is due to high levels of inflation, which has remained above the upper end of the RBI’s mandated 2-6 per cent target range for all months barring March in this year.
While RBI Governor Shaktikanta Das said last week that the economy was showing stronger-than-expected recovery, he also mentioned that authorities need to be “watchful” regarding the sustainability of demand after the end of the festive season.