Expect Long Pause In Rate Cut Until Inflation Falls To Comfortable Level
The fourth bi-monthly meeting of the Monetary Policy Committee (MPC) took place from 2nd December to 4th December. The announcements were more or less in the expected line. MPC decided to keep the rates unchanged and continue with its accommodative stance.
To aid economic recovery, RBI governor announced that the accommodative stance will be continued this year, and will be extended to the next financial year also. Though the Q2FY21 GDP numbers came out better than expected, the domestic economy needs more support to fall back to the growth track.
RBI projects the Indian economy to contract by 7.5 percent in FY21, with positive growth rate in the next two coming quarters.
Yet, the fear of rising inflation is evident in the RBI governor’s address. MPC expects inflation to remain at elevated levels with some relief in the winter months. The inflation rate as measured by Consumer Price Index (CPI) reached 7.6 percent in October. And, the RBI projects the inflation rate at 6.8 percent for Q3FY21, and 5.8 percent for Q4FY21.
Apart from distribution and delivery challenges, two key issues would be vaccine uptake and monitoring, said Kang.
“Vaccine uptake requires confidence in the vaccines and the delivery system, and we seem to sway from vaccines being the ultimate solution (which they may not be) to vaccines being developed so rapidly and with many short-cuts so they must necessarily be unsafe and untested (which is not true),” said Kang. “Also, documentation of vaccination and the tracking and investigation of vaccine safety events are essential components of monitoring which have traditionally not been done well. So thinking through the external monitoring or support mechanisms would be helpful.”