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RBI Monetary Policy: Economists weigh in on MPC's accommodative stance with inflation at 7.5%

Updated : December 04, 2020 08:06 PM IST

The Reserve Bank of India (RBI) has maintained a status quo on rates following its latest monetary policy meeting. The Monetary Policy Committee (MPC) voted unanimously to hold the repo rate unchanged at 4 percent.

Pranjul Bhandari, Chief India Economist at HSBC said that this policy could be the last of the loosest policies and expects the RBI to be more hawkish going forward.

“The kind of unconventional monetary policy we are seeing globally, I think inflows into India will continue for longer. There is enough reasons to think that inflation is going to remain elevated in India. It is very easy to say that there are supply side problems which will eventually peter off, but the truth is we have been saying that for the last six months. Once supply side problems remain for long, they feed into inflation expectations and once inflation expectations have risen, inflation is a real problem and it doesn’t matter from where it is coming – supply side or demand side. Once we have a vaccine and people start moving around, there is demand for services and services inflation could go up; and India has not had a very pleasant history with services inflation. I am worried that if that happens, particularly in the first half of the next fiscal year, then there will be some trouble.” she said.

Samiran Chakraborty, Chief Economist at Citi said that he doesn’t expect the RBI to tighten the policy regardless of the inflation outlook.

“In an active sense, I don’t think RBI is going to tighten regardless of what the inflation outlook is. If they are not tightening at 7.5 percent inflation, then it is hard to imagine why they would be tightening at 5.5 percent inflation early next year. So, my sense is tightening will more be a function of growth coming back to normalcy, having a more sustainable growth than more driven by inflation,” he said.

Lakshmi Iyer, CIO - Fixed Income at Kotak Mahindra AMC said that she is expecting a liquidity driven rally on the back of RBIs reiteration of liquidity stance and continuation of accommodative bias.

“Going forward there is going to be a liquidity driven rally on two counts because the RBI has reiterated its liquidity stance and most importantly they have continued with accommodative bias. I think these are very strong cues for the bond markets. So, while we do expect liquidity to recede going into April, I think for the next couple of months we are going to see yield curve anchored with a slightly benign bias because there will be the carry trade that will prevail,” she said.

For full discussion watch video
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