Case Study - RBI likely to maintain status quo on interest rate
1. RBI LIKELY TO
MAINTAIN STATUS QUO
ON INTEREST RATE
GUIDED BY- MERVIN FELIX CALEB
GROUP 10
VEDUKALA HIMABINDU
VEMU PRAVALIKA
VANAM VIVEK
BODEPALLI REVATHI
VETAPALEM SWETHA
2.
3. Amid fears of a third wave of coronavirus pandemic and hardening of retail
inflation, the Reserve Bank is likely to maintain status quo on interest rate.
And watch the developing macroeconomic situation for some more time before
taking any decisive action on monetary policy.
The RBI is scheduled to announce its bi-monthly monetary policy review on
August 6 at the end of the three-day meeting – August 4-6 – of the Monetary
Policy Committee (MPC).
The RBI Governor-headed six-member MPC decides on the key policy rates.
The panel had left the rates unchanged last time citing concerns on inflation.
Higher commodity prices and rising global prices post the robust recovery in a
few industrial countries will have implications on production costs.
We expect the RBI to be in a wait-and-watch mode as it has limited elbow room
to manoeuvre monetary policies,” opined Rumki Majumdar, Economist, Deloitte
India.
INTRODUCTION
4. Shriram Transport Finance Managing Director and CEO Umesh Revankar too
said the central bank will keep the repo rate at the present level despite higher
inflation.
“The rise in inflation is because of the fuel prices, which will get normalise (in
sometime), and the inflation pressure will ease," Revankar said.
The Reserve Bank, which mainly factors in the retail inflation while arriving at
its monetary policy, has been mandated by the government to keep Consumer
Price Index (CPI) based inflation at 4 per cent with a margin of 2 percent on
either side.
Inflation ruled above the tolerance band during June-November 2020 and has
again moved above the upper tolerance threshold in May and June 2021.
The sense is that inflation will persist at these elevated levels for some months
before easing in the third quarter of 2021-22 when the kharif harvest arrives in
markets, a recent RBI article said.
5. Ranen Banerjee, Leader - Economic Advisory Services, PwC India said that
given the status quo stance taken by the US FOMC as well as other major
monetary authorities with the inflation being viewed as transitory, "we can
expect a similar status quo announcement by the MPC too".
Growth concerns and weak demand conditions owing to impact of second
wave of Covid on employment and declining labour force participation rate
combined with nervousness of a possible third wave, puts constraints on any
change in stance by the MPC, he said.
Further, tranches of GSAPs and OMOs can be expected to keep the yield on G-
Secs from rising as there is a constant upward pressure on it owing to higher
borrowing programme of government and inflationary pressures, Banerjee said.
A BofA Global Research report said: "We expect the RBI MPC to look through
the transitory hump in inflation and stick with a unanimous dovish pause in the
upcoming August 6 policy.
The MPC is likely to revise up its FY22 average CPI inflation forecast slightly
from the previous 5.1 per cent and flag potential upside risks.
6. "As per a research report by Radhika Rao, Economist at DBS Group
Research, the six-member monetary policy committee will adopt a wait-
and-watch mode in August.
"Policy commentary is likely to draw confidence from the turnaround in
recent data but express caution over a potential third Covid wave," it said.
The CPI-based retail inflation was 6.26 per cent in June and 6.3 per cent in
the previous month.
After the June MPC meet, the Reserve Bank of India had left the
benchmark interest rate unchanged at 4 per cent.
It was for the sixth time in a row that the MPC maintained status quo on
interest rate.
13. OPEN MARKET OPERATIONS To control the inflation , the RBI should sell the
securities in the money market which sucks out excess liquidity from the market
which is the part of monetary policy.
RBI should increase the Repo rate, as it will make the commercial banks not to
take risk to borrow money from the RBI, which will make the balance of demand
of money(loans) and deposits in the bank.
REVERSE REPO RATE INCREASING By increasing the reverse repo rate ,
Commercial bank deposit money in RBI when excess of liquidity is present , by
whick banks will get higher interest rate . In the same way inflation is reduced.
OTHER MEASURES
14. People should invest their money in the banks not on the gold or real
estate as it will reduces the liquidity of money in the market and reduces
the inflation.
By reducing the interest rates, we can reduce the cost-push inflation in
which costs of goods are reduced.
CONTROL ON FOREIGN DIRECT INVESTMENT Due to high FDI there is a
scope for increasing of exports, which causes the shortage of goods for
local people . In that sense the cost of good rises which causes the
inflation, So there must be a control on FDI.
15. In the near future, a rising inflation is not as great a threat as a stalled
economy.
The pandemic claiming lives & man days is nom less a threat.
Vaccination (at least targeted coverage) id clearly the best step forward.
The MPC decision to stick to flexible inflation targeting is widely
considered a welcome step.
A lot rides on RBI taking timely action to regulate liquidity when the
economy &with it the demand revives.
CONCLUSION