Analysts are divided on the monetary policy committee opting for a rate cut or rate status quo this week as the RBI panel grapples with high retail inflation on one hand and gloomy economic forecasts on the other amid the Covid-19 pandemic and the now intermittent lockdown.

The majority of the economists said the interest rate setting body will not lower the repo rate this time around as retail inflation, which has been above the tolerance band of the RBI, will continue to remain firm till September.

Moreover, the central bank will wait for the policy repo rate cut to play out fully before announcing any further reductions.

The Reserve Bank has cut its signal repo rate by 115 basis points after the pandemic and though the banks have transmitted the rate cuts to a large extent, the system is still awash with liquidity. Repo rate is the rate at which the RBI lends to the banks for the very short term.

The monetary policy committee headed by RBI governor Shaktikanta Das is scheduled to meet for three days beginning August 4 and will announce its decision on August 6.

“We believe an August rate cut is unlikely. With the 115 bps (basis points) reduction in repo beginning February, banks have already transmitted 72 bps to the customers on fresh loans. Large banks have transmitted as much as 85 basis points. This has happened because of a proactive RBI using liquidity among others as a tool to serve its policy objective,” the SBI said in its research report Ecowrap.

“The RBI policy committee will be in a tough spot due to overarching weakness in growth. Nonetheless a pause on rates is also backed by cumulative 115 basis-point- cut and concerns over inflationary expectations,” said Radhika Rao, economist at DBS Group Research.

However, there are a few others who feel that growth will continue to remain the top priority for the panel, which will bring down the repo rate by another 25 basis points, especially since inflation is likely to taper out in the next couple of months given the weak demand.

Some analysts said the MPC may bring down the reverse repo rate by a wider margin to dissuade banks from parking their funds with the RBI.

The repo and the reverse repo rate stand at 4 per cent and 3.35 per cent, respectively, at present. Besides the rates, observers do not rule out the central bank taking a decision with regard to the loan moratorium which is set to end on August 31.

They expect the RBI to extend the moratorium via-a-vis some select stressed sector and have not ruled out a debt recast plan, either.

Shanti Ekambaram, group president-consumer banking, Kotak Mahindra Bank, feels the interest rates cuts so far have had little impact on demand stimulation or growth.

“The pandemic is hurting both businesses and consumers alike and the uncertainty around when things will normalise has led to lacklustre and muted demand and supply disruptions. Having front loaded the rate cuts and with inflation still above the 6 per cent mark, the MPC may decide to wait and watch and take a pause in August to monitor India’s progress in its fight against the virus — both from a health and economic point of view,” she said.

Ekambaram said the MPC could possibly cut the policy rate by a further 25 basis points in the meeting at the end of September, which is traditionally India’s busy season.

Retail inflation stood at 6.09 per cent in June compared with the imputed number of 6.27 per cent in May.

Economists are of the view that inflation is likely to remain elevated at least till September because of supply constraints.

Suman Chowdhury, chief analytical officer of Acuité Ratings & Research, said 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.

Multiple concerns

Kapil Gupta, economist at Edelweiss, expects the MPC to reduce the repo rate by 25 basis points as growth remains weak, India’s unlocking is slow and RBI’s own forecast indicates rising asset quality stress.

“Thus, growth revival should be policy priority. Headline inflation, while currently above RBI’s projected trajectory, has probably peaked out. It should move towards 4 per cent or below by December 2020. Also, the RBI should look through the temporary spike in inflation as it is being driven by Covid-19-related supply disruption rather than strong pricing power or wages which are actually worsening,” Gupta said.