RBI Governor Shaktikanta Das-led Monetary Policy Committee (MPC) will announce its policy decision on Friday, at the end of a scheduled review that began on Wednesday. This is the first meeting of the six-member MPC after Budget 2021. The Reserve Bank has slashed its key lending rate i.e. repo rate by 115 basis points since March 2020 to cushion the economy from the shock of coronavirus crisis.
The central bank had last cut its policy rate on May 22, 2020 when Covid-19 posed an unprecedented challenge to the economy. Since then, the banking regulator has maintained the repo rate – the key interest rate at which the RBI lends money to commercial banks – steady at a 19-year low of 4 per cent. The reverse repo rate – the rate at which the RBI borrows from banks – is at 3.35 per cent.
The RBI is seen holding the repo rate at 4.0 per cent in 2021 and possibly beyond, according to the median estimate in a Reuters poll. Most experts reckon that the banking regulator will refrain from tinkering with interest rates as inflation has remained above its targeted 4 per cent for more than a year. It is likely to continue with an accommodative policy stance in order to push growth.
Retail inflation fell sharply to 4.59 per cent in December 2020, the latest data shows. Retail inflation based on the Consumer Price Index (CPI) was 6.93 per cent in November.
Economists will closely watch for any changes in the RBI’s economic projections and views on the Budget, given that the country’s gross domestic product (GDP) is still in a contractionary mode amid signs of rebound. India was hit hard by the pandemic, suffering the worst contraction in the June quarter, and the GDP is projected to contract by a record 7.7 per cent in the current fiscal ending March 31, 2021.
A pick-up in manufacturing and rollout of the immunisation campaign has reduced some of the pessimism surrounding the economy. The Pre-Budget Economic Survey has predicted a “V-shaped” recovery, saying that the Indian economy will rebound, with 11 per cent growth, in the next financial year.
It would also be interesting to watch RBI’s stance on liquidity, particularly in wake of the massive borrowing programme announced in the expansionary budget as is reflected in the fiscal deficit, which has been pegged at 6.8 per cent for 2021-22.