RBI MPC: Key things you need to watch out for

The three-day meeting of the Monetary Policy Committee (MPC) of the RBI is underway, with the central bank looking at ways to offset the impact of the second wave of the pandemic. The RBI needs to ensure the economic revival from the severe second wave of Covid-19 pandemic. There is a wide expectation among economists and analysts that the Reserve Bank of India (RBI) is likely to maintain status quo in its monetary policy review on June 4 for the sixth consecutive time.

Here are five key things you must watch out for: 

There may be no change in your loan EMIs

The six-member Monetary Policy Committee (MPC) is expected to keep the benchmark repo rate (the rate at which banks borrow short term funds from the Reserve Bank of India,) at 4% and the reverse repo rate which is RBI’s borrowing rate at 3.35%. The RBI has been holding the rates low for the last five bi-monthly reviews to support growth hit by the Covid-19 pandemic.

With no change in the repo rate and reverse repo rate, the likelihood of an immediate reduction in borrowers’ loan EMIs is less. On the other hand, no change in policy rates will mean good news for fixed deposit (FD) investors as banks may not cut interest rates on FDs any further.

RBI may ensure enough liquidity

Since the last monetary policy meeting in early April, it seems like the world has changed, at least for India. Covid 2.0 has caught the country unawares. Just when we thought we are gradually leaving the worst of the pandemic behind us, the virus hit the country, its people and the economy with a virality that caught us off guard.

Investors will watch for cues on extension of a bond-buying programme as well as for any change in language on policy stance guidance.

The RBI has said earlier that it will ensure there is adequate rupee liquidity in the financial system to help the productive sectors and the government’s massive borrowing programme, and it may yet again reiterate that message.

In the previous policy review, the RBI had also committed to buying Rs 1 lakh crore (around $13 billion) worth of government bonds. Markets will see whether the central bank will announce potentially more aggressive bond purchases this time.

Experts say the while the central bank might maintain an ‘accommodative’ stance, managing the increased supply of sovereign bonds will be a tightrope walk.

When will economy recover?

The better-than-expected GDP numbers released by the government on May 31 will provide much-needed comfort to the MPC on the growth outlook.

The gross domestic product (GDP) contracted 7.3% in FY21 as per data released by the government on May 31.

In the last policy review, the RBI had clearly sounded cautious on the evolving growth situation saying lockdowns could hamper growth recovery. In April, the MPC had retained the GDP growth forecast for FY22 at 10.5%.

Given that many states are back to complete or partial lockdowns and there have been downward revisions in the GDP growth forecast for FY22 by many multilateral institutions, will the central bank also tweak its GDP growth forecast is something we’ll have to wait to find out.

Tackling Inflation Monster

The consumer price index (CPI), which the RBI tracks for setting interest rates, was slightly lower at 4.2% in April as against 5.5% in March. But a lot has changed in the last one month. The MPC had projected CPI inflation at around 5% for FY22 in its previous meeting.

Companies are feeling the pinch of higher input costs. As the second wave eases, producers, manufacturers could pass on more cost increases to consumers, pushing up inflation. While the the fears of firming inflation may refrain the MPC from tinkering with the interest rates, it remains to be seen if RBI revises its 2021-22 projections for inflation.

RBI’s Relief Measures

The RBI had unveiled fresh measures in the month of May to help lenders tide over mounting bad loans and give certain borrowers more time to repay their debts, as surging Covid-19 infections triggered strict lockdowns in several states.

There is a wide expectation that more measures might be unveiled this week. Financial institutions, automotive dealers and real estate firms have sought a temporary moratorium. One must keep an eye on any announcements coming through on such relief measures in the policy announcements on Friday.