RBI MPC | Can central bank pull market down from Budget high, all eyes on policy outcome


The Reserve Bank of India’s (RBI) three-day Monetary Policy Committee (MPC) meeting is underway and the verdict is due on February 5. After the “growth-oriented” Union Budget 2021, softer inflation prints along with signs of improvement in the economy, there is some talk of the central bank tweaking policy rate.

Retail inflation fell sharply to 4.59 percent in December 2020, the latest data shows. Retail inflation based on the Consumer Price Index (CPI) was 6.93 percent in November.

The RBI mainly factors in the retail inflation while arriving at its policy rate and it has to keep the retail inflation at 4 percent (+,- 2 percent).

It is, however, expected that the MPC will keep the key policy rate unchanged though observers’ focus will be on RBI’s view of the economy and the Union Budget 2021.

The current repo rate, or the rate at which the RBI lends to banks, is 4 percent. The central bank last revised its policy rate on May 22 when COVID-19 posed an unprecedented challenge, hammering the economy. The central bank has cut policy rates by 115 basis points since February 2020.


While the economy is slowly coming back on track, the RBI would not want to derail the pace of growth by tweaking the rates or stance. Experts point out economic growth has to be sustainable before the rates are raised.

Aditi Nayar, Principal Economist at ICRA, expects an extended pause for the repo rate, with the stance to be changed to neutral in the August 2021 policy review or later, once there is clarity on the durability of the recovery.

Sunil Kumar Sinha, Principal Economist and Director of Public Finance, India Ratings and Research, does not expect any change in policy rate as growth needs to be supported through the monetary policy.

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank, said that the RBI would draw comfort with the recent moderation in headline inflation, which would keep it accommodative mode for now, complementing the pro-growth intention of the government.

“Much more relaxed path of fiscal consolidation would pose upside risks to core inflation, thereby prompting some caution. In the upcoming policy, we expect the MPC to maintain a status quo on rates and monetary policy stance with some clarity or guidance on the pace of normalisation of the operative target rate towards pre-pandemic levels,” said Bhardwaj.

The recovery was still nascent and the fiscal push/higher borrowings seen in the Budget warranted continued RBI support, Brokerage firm Edelweiss Securities said in a note.

“A dovish Fed, comfortable BoP and domestic disinflation (more than anticipated) give the RBI elbow room to keep monetary conditions easy for long,” Edelweiss said.

The market

The market seems to have factored in a status quo from the RBI, experts said. The central bank’s positive outlook on the economy would cheer the market.

The market has been witnessing strong gains after the Budget and the bulls may continue to dominate the market.

Analysts believe the bull roar in the market will continue and the Nifty may scale the milestone of 15,000 by the expiry of the February F&O series.

“It has been a picture-perfect rally in last two sessions, with the broader indices clocking record Budget-day gains in the last more than 20 years. Although some profit booking can be expected, we expect stock-specific action to continue. After a brief pause, we may see the Nifty aiming for the magical mark of 15,000 by February expiry,” said Rahul Sharma, Head – Technical & Derivatives Research, JM Financial Services.

Gaurav Ratnaparkhi, a senior technical analyst at Sharekhan by BNP Paribas, said the Nifty could head towards 15,000 in the short term.

“On the downside, the gap area of 14,469-14,336 will act as a crucial support zone. The 20-day moving average is also near the gap area, which will offer additional support,” said Ratnaparkhi.

After the March lows, the rally in the market was led by liquidity infusion by the central banks. The market still needs liquidity to sustain its gains. The central bank would not want to roil market sentiment by either rising rates or changing stance, experts said.

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