Mumbai: Rising COVID-19 cases may come in handy for the Reserve Bank of India to reiterate its accommodative stance to push growth despite rising inflation and bond yields, when the central bank’s MPC meets to decide on rates next week. A prospect of a lockdown adds to the growth concerns even as there risks of inflation from rising global crude and commodities prices.

After bottoming out to around 8500 cases a day in early February, Daily fresh cases of COVID-19 infections to over 65000 by end of March. Despite an aggressive vaccination drive, the country has added over 12 lakh fresh cases in the last two month, with more than half new infections in Maharashtra which houses the country’s financial capital- Mumbai. A lockdown in the state would derail the recovery in the bond market as well.

Volatile food prices and rising oil prices has caused India’s consumer price inflation to exceed the upper band of 6% several times in 2020. “(This is ) inhibiting the RBI’s ability to keep accommodative monetary settings in place during the height of the pandemic” said Moody’s Analytics an independent arm of global ratings firm Moody’s.” Higher fuel prices will keep upward pressure on headline CPI and keep the RBI from offering further rate cuts” The benchmark policy rate is now at 4 per cent.

But a prospect of a lockdown again arising out of rising infection could derail the fragile recovery in the economy, post the lock-down in early FY’21. “I think RBI most likely will maintain its base case of a strong recovery in activity, but may flag risks from the rising Covid-19 cases” said Rahul Bajoria, India economist at Barclays Capital. ” So it provides balance to upside inflation risks”

The Reserve Bank has been very vocal about its accommodative stance to revive growth despite rising prices. “I wish to reiterate that we at the Reserve Bank are fully committed to use all our policy tools to secure a robust recovery of the economy from the debilitating effects of the pandemic” said RBI governor Shaktikanta Das at the Times Network India Economic Conclave, last week

But now with the rising COVID-19 numbers, the RBI will be more than justified in its stance. “Resurgence of Covid-19 cases would be one of the key factor in RBI’s decision making process” said Soumyajit Neogi, Associate director, India Ratings. ” But RBI and MPC members would like to be watchful and will be maintaining proactive stance”

Besides, inflation, the bond market too seems to have not taken RBI’s operations too kindly after it announced its intention to unwind the cash reserve ratio- CRR at the last MPC meeting. After bottoming out at 5.82% (monthly average) in Jul-20, the yields on ten year government bonds gradually picked up, with 30 bps of an uptick in 2021 so far, according to Aicute Ratings and Research. ‘This hardening has played out despite the continuation of status quo on record low policy rate along with reiteration of accommodative stance and moderation in CPI inflation from elevated levels (notwithstanding some upside seen in the latest print for Feb-21)” it said.

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