US Fed keeps rates steady, RBI likely to follow suit; here’s why

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The US Federal Reserve decided to keep rates unchanged from near zero. It also decided not to adjust the pace at which it buys government bonds each month last night. The Fed statement said that the US economy is recovering despite lingering Covid-19 concerns.

Fed Chair Jerome Powell also hinted that the US economy is still a good deal away from making “substantial further progress” toward stable prices and maximum employment. The central bank chief emphasized the continued risk that Covid poses. Powell said in his press conference that he expects inflation to remain above the central bank’s target level in the months ahead, but that it isn’t enough to cause the Fed to change its policy stance so far.

Will the RBI take a cue?

The Reserve Bank of India is scheduled to meet for the policy review from August 4-6.

Currently, the repo rate or the lending rate is at 4% and reverse repo rate or RBI’s borrowing rate is at 3.35% . These rates were kept unchanged during the June’s monetary policy review statement. The MPC (Monetary Policy Committee has kept the key benchmark rates unchanged in its last six reviews.

Following the US Fed’s decision to keep rates steady the RBI may follow suit as there are enough reasons to support this.

While them worst of the second wave of Covid-19 is behind us, the economy is facing a bumpy ride. High-frequency, alternative and market indicators such as retail activity are not showing the kind of strong recovery that was expected. Manufacturing and services sectors show stress. The Markit India Services Index declined to 41.2 last month, from 46.4 in May. Industrial production expanded but at a slower pace, growing 29.3% in May from a year earlier, compared with almost 135% in April.

While inflation is at over a year high, the central bank is expected to keep all focus on reviving growth in its upcoming policy and hold rates at the record level for the seventh time.