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Retail inflation check on policy rate cut

A note from Nomura said overall the new external members appear to be 'more neutral-to-dovish' in their policy views
The meeting of the MPC from October 7 to October 9 was announced by the RBI on Tuesday not much later than the Centre’s midnight announcement of the panel’s three new independent members —  Ashima Goyal, Jayanth R Varma and Shashanka Bhide.

Our Special Correspondent   |   Mumbai   |   Published 07.10.20, 01:19 AM

The newly constituted monetary policy committee — which has been packed with notable doves — is expected to keep the policy rates unchanged on Friday as retail inflation stubbornly hovers above 6 per cent, the outer bound of the RBI's tolerance limit.

The meeting of the MPC from October 7 to October 9 was announced by the RBI on Tuesday not much later than the Centre’s midnight announcement of the panel’s three new independent members — Ashima Goyal, Jayanth R Varma and Shashanka Bhide.

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Soon after the appointment of the trio, observers were looking at  their leanings  on rates: while Goyal is a dove, Varma may have a dovish tilt even as Bhide could be neutral.

A note from Nomura said overall the new external members appear to be “more neutral-to-dovish” in their policy views. Nomura said they are likely to be vocal on liquidity, credit market dynamics and may not shy away from advocating unconventional or untested measures.

“`They are likely to look through the current phase of elevated inflation and find space to lower rates further. In the previous external panel, Chetan Ghate was more hawkish; so the composition of the current MPC has turned incrementally more dovish, in our view,” Nomura economists Sonal Varma and Aurodeep Nandi said.

However, the note said, the members were inducted following considerable policy easing, which limits the scope to turn incrementally more dovish.

It is largely felt MPC will leave the repo rate unchanged at four per cent and any cut is likely only in the next calendar year. However, there are others who expect a cut in December as inflation is likely to soften after September.

Nomura sees RBI governor Shaktikanta Das and Goyal as the firm doves; Jayanth Varma may have a dovish tilt. On the other hand, Bhide and RBI executive director Mridul Saggar are seen as being neutral while deputy governor Michael Patra is having an hawkish tilt.

“We do not believe the new appointments dramatically change the near-term monetary policy outlook,” said Rahul Bajoria, economist with Barclays. “We believe that room to cut rates further will likely open up only in Q1 2021.”

All 66 respondents in a Reuters poll conducted ahead of the originally scheduled MPC meeting said they expect the repo rate to remain unchanged at 4 per cent and a large majority saw no cuts until the January-March quarter.

The apex bank has so far slashed rates by 115 basis points in response to the Covid-19 pandemic since late March.

The RBI however is expected for the first time since February provide guidance on how the economy is performing amid the coronavirus pandemic and give its outlook on inflation and growth.



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