MPC Expectation - Acuité Ratings & Research

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research

"As the pandemic continues to disrupt economic activities across India and the likelihood of intermittent local lockdowns increases, the growth risks for FY21 continue to intensify further. Acuité Ratings has revised the projected contraction in real GDP to 10% for the current year. MPC has pursued a fairly strong accommodative policy since the last one and a half years with the repo rate having been slashed by 250 bps. Further, RBI has also responded promptly to the Covid crisis by providing a significant monetary stimulus and enhancing systemic liquidity very significantly since March. However, Acuité believes that there may be further limitations of an accommodative policy in reviving a economy which is currently in a contraction mode. It is unlikely that further rate cuts may help much to revive household demand or private consumption expenditure at this juncture. Nevertheless, the MPC may seriously consider another round of rate cut to signal its intent to address the increased growth concerns and provide comfort to the volatile markets. While food inflation had persisted at high levels in April-May due to the lockdown driven supply bottlenecks, the CPI print for June 2020 has started to reflect a declining trajectory and we expect a further reduction as the supply pressures ease and the benefits of healthy agricultural growth reaches out to the consumers. The risks of any significant uptick in core inflation may also get largely offset by a very gradual pickup in consumption demand. Therefore, we don't expect near term inflation concerns to be a major constraint in the MPC rate cut decision. At the same time, it is clear that we are near to the bottom of the rate cut cycle."

Source : Equity Bulls

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