Motilal Oswal: Supporting The Economy Assumes Primacy In MPC Meeting; Along With Higher CPI Inflation

Motilal Oswal Report

In what was being touted as a tough monetary policy decision in light of massive contraction in economic activity, along with higher consumer price index inflation (6.1% YoY in June 2020), the Monetary Policy Committee held up to its inflation-targeting mandate by keeping policy interest rates unchanged in its monetary policy resolution.

The repo rate stands at 4%, the reverse repo rate at 3.35%, and Marginal Standing Facility rate stays intact at 4.25%. The MPC was unanimous in its decision to maintain the status quo on rates and also on the ‘accommodative’ stance.

Furthermore, just like in the previous two ad-hoc monetary policy meetings, the Reserve Bank of India refrained from giving any estimates of either inflation or real gross domestic product due to fluid economic conditions.

It expects headline inflation to remain “elevated” in Q2 FY21 due to persistent supply chain disruption on account of Covid-19, along with higher fuel taxes that are imposing cost-push pressures on both food and non-food prices.

However, the RBI believes downward momentum in headline inflation could be achieved on account of a favorable base. Based on this assessment, the RBI expects inflation to “ease” in the second half of FY21.

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