Negative real rates in India and recovering growth paired with high inflation predict that its central bank, Reserve Bank of India has little scope for more monetary stimulus, but policy will most likely stay accommodative, economists and analysts said.
September signalled a positive start to industries, as industrial production rose for the first time in six months, rising goods and services tax collections, higher energy consumption, and an uptick in the purchasing managers’ index among other gauges, also signify steady progress in the respective sectors.
With inflation hovering above 7% in October for a second straight month, well above the RBI’s medium-term target of 4%, views that India is near the end of the current rate-cutting cycle have gained more audience. Though the central bank is unable to hike rates due to the impact of the COVID-19 pandemic on economic activity, it would still be mindful of the long-term impact of negative real interest rates on the economy, economists believe.
The central bank cannot significantly increase rates due to the tremendous impact of the COVID-19 pandemic on economic activity, it would still be mindful of the long-term impact of negative real interest rates on the economy, economists believe. “High inflation is a risk the RBI cannot afford to ignore,” Nomura economists wrote in a note.
The RBI reported on Wednesday that prospects for economic recovery have brightened, a comment interpreted by some analysts that the bank may not need to actively step in more to boost growth. If the growth is sustained over the next few months, the RBI said it expects the economy to escape from the contraction seen in the first two quarters and return to positive growth in the December quarter.
Many analysts, however, regard COVID-19 as an unpredictable aspect and they further opine that the central bank would aid banks and corporates with lower borrowing costs unless the second wave of infections coerces it to opt for more direct support through rate cuts. India’s daily coronavirus infections are less than half their peak hit in September, but the economy is still recovering from sweeping lockdowns and the repercussions left on the economy. Since March, the RBI has cut down the repo rate by 115 basis points to reduce the intensity of shock from the crisis.