RBI To Hold Rates As Inflation Rises, Even In Recession: Poll

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The Reserve Bank of India will keep rates on hold until early next year in a delicate balancing act between curbing high inflation and lifting the economy from its worst recession on record, a Reuters poll of economists showed.

August inflation, at 6.69 per cent, held above the top end of the RBI’s medium-term target range of 2-6 per cent for the fifth consecutive month amid supply disruptions, while coronavirus infections spread in India at the fastest pace anywhere in the world.

The central bank held its main repo rate at 4.0 per cent at its meeting last month and said it would keep policy accommodative to support an economy which nosedived 23.9 per cent last quarter, the weakest performance on record.

All 66 respondents expected no change at the September 29-October 1 meeting and the consensus showed rates would remain on hold in December, according to the poll which was conducted over the last few days.

That compared with a quarter-point cut in the fourth quarter predicted a month ago.

The Monetary Policy Committee (MPC) is then forecast to cut its repo rate by 25 basis points to 3.75 per cent in the January-March quarter, holding until at least the end of the next fiscal year.

“The current stagflation conditions are putting the MPC in a difficult position. Disrupted supply chains caused by irregular lockdowns will keep inflation elevated,” said Hugo Erken, head of International economics at Rabobank, referring to a state of persistent inflation but with no growth.

“Given the inflation mandate of the RBI, the risk of high inflation becoming entangled in high inflation expectations and policy credibility, we feel the RBI will keep the status quo.”

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