RBI Policy Review: Despite new members, MPC expected to maintain old stance

Despite the addition of new members with diverse academic backgrounds, persistently high inflation will deter the Reserve Bank`s Monetary Policy Committee (MPC) from administering a dose of a lending rate cut, experts opined

The expectations from the penultimate policy review of 2020 comes as the MPC commenced its meet on Wednesday. Source: PTI

Despite the addition of new members with diverse academic backgrounds, persistently high inflation will deter the Reserve Bank`s Monetary Policy Committee (MPC) from administering a dose of a lending rate cut, experts opined.

The expectations from the penultimate policy review of 2020 comes as the MPC commenced its meet on Wednesday.

The original schedule of the penultimate meet was September 29-October 1. However, it was postponed as there were three vacant posts of external members in the MPC which the government had to appoint.
The quorum for the meeting of the MPC is four members, with each member having one vote.

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Three members of the panel are from the RBI, including the central bank`s Governor and the rest three are external or independent members. The four-year terms of three external members of the MPC, appointed in 2016, ended last month.

The Centre on Monday appointed Ashima Goyal, Jayanth R. Varma and Shashanka Bhide as the new members of the MPC.

"The new MPC composition comprises diverse academics which could bring a wider perspective to the monetary policy arena. The upcoming policy nonetheless will be a damp squib on the conventional policy action front," said Madhavi Arora, Lead Economist, FX and Rates for Edelweiss Securities.

"The new external members are likely to keep the continuity of policy tone set by the previous MPC in October policy and their thought process and biases would be firmly established over the course of time."

Other economists and industry experts also cited elevated inflation levels as a key determinant for a pause in policy easing.

Notably, the expected move comes at a time when industrial output is at historic low due to the Covid-19 pandemic.

A policy easing, if administered, would have theoretically allowed commercial banks to reduce their lending rates, thereby helping both consumers and the industry to get cheaper finance.

Subsequently, the increased money flow in the hands of consumers would have helped to boost demand, and for the industry provided a higher flow of capital investment on the back of lower cost.

Nonetheless, retail inflation has been at an elevated level during July-August.

The retail or consumer price index stood at 6.69 per cent in August. It had risen to 6.73 per cent in July.

As per the data, retail inflation level has reached the upper limit of the medium-term CPI inflation target of four per cent. The target is set within a band of plus/minus two per cent.

According to G. Murlidhar, MD & CEO, Kotak Mahindra Life Insurance Company: "While the prevailing high CPI levels may preclude any immediate action on rates by the MPC, we expect the MPC to acknowledge the need to support nascent and fragile economic recovery."

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"We expect the MPC to keep key rates unchanged and reiterate its accommodative stance based on lower forward trajectory of CPI inflation."

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