RBI Keeps Policy Rates Unch as It Seeks Clarity on Inflation

• Published on
• 06 Aug 2020, 08:01 PM

By Sophia Rodrigues

The Reserve Bank of India left its key policy rates unchanged and maintained the accommodative stance, judging it is prudent to pause amid an uncertain inflation outlook.

At its bi-annual monetary policy meeting, the RBI decided to keep the policy repo rate at 4.0% and the reverse repo rate at 3.35%.

The outlook for inflation is muddled not only due to spike in food prices and some cost-push pressures but also because of lack of clarity on the inflation numbers for April and May.

“The June release of headline inflation after a gap of two months and imputed prints of the CPI for April-May have added uncertainty to the inflation outlook,” the RBI said.

CPI inflation rose 6.1% in June, accelerating from a 5.8% rise in March, according to data published by the National Statistical Office. NSO published index numbers for April and May using imputation method but did not publish inflation rate.

The RBI said it is regarding the CPI prints for April and May as a break in the series but still requires clarity on the headline prints to get a better understanding on inflation outlook.

Adding to the complexity is the spike in food prices due to floods in eastern India and the ongoing lockdown related disruptions, and cost-push pressures from high taxes on petroleum products, hikes in telecom charges, rise in steel prices and increase in gold prices on safe haven demand.

This means the RBI is likely to pause until it is confident that inflation remains sustainably within the target. It is likely the RBI is particularly conscious of the risk of inflation staying above 6% in the September quarter because that would mean failure to meet the inflation target and hence explanation to the government.

Despite this, it is unlikely the RBI’s pause would last long because supporting growth still remains its primary objective.

The RBI’s statement suggests it remains concerned about the “extremely weak” state of the economy in the midst of an unprecedented shock from the ongoing pandemic.

“The economy is experiencing unprecedented stress in an austere global environment,” the RBI said in its statement.

“Extreme uncertainty characterises the outlook, which is heavily contingent upon the intensity, spread and duration of the pandemic – particularly the heightened risks associated with a second wave of infections – and the discovery of the vaccine. In these conditions, supporting the recovery of the economy assumes primacy in the conduct of monetary policy,” the RBI said.

--Contact: Sophia@centralbankintel.com