MPC to maintain accommodative stance at least in the next two reviews

 The disconcertingly sharp new wave of Covid-19 cases has reignited uncertainty regarding the economic outlook in the immediate term

In February 2021, the Government of India (GoI) had unveiled the Union Budget for fiscal 2021-2 (FY22), which targeted a growth-boosting expansion in capital spending for the upcoming fiscal. The latest available consumer price inflation (CPI) prints had shown a sharp correction to 4.6 percent in December 2020. Moreover, we were sanguine that the worst of the Covid-19 pandemic was firmly behind us.

This was the backdrop at the time of the Monetary Policy Committee’s (MPC’s) final scheduled review for FY21, which was the last meeting before the review of the inflation-targeting framework by the GoI.

At that meeting, the MPC had kept the repo rate unchanged at 4 percent, in line with its primary mandate of ensuring that the CPI inflation remains within a band of 2-6 percent; this target has now been retained by the GoI until March 2026.

In the February 2021 review, the MPC had placed its CPI inflation projections at 5.2 percent in Q4 FY2021, 5.0-5.2 percent in H1FY22, and 4.3 percent in Q3FY22, with risks broadly balanced.

After declining to 4.1 percent in January 2021, the CPI inflation reared up to 5 percent in February 2021, and we expect it to exceed 5.5 percent in March 2021. Even as fuel prices remain high, a revival in commodity prices, demand, and pricing power is likely to result in the core inflation being relatively sticky in FY22. Accordingly, we anticipate that the average CPI inflation in FY22 will remain well above 4 percent, the mid-point of the MPC’s medium-term inflation target band. Therefore, our baseline expectation is an extended pause for the repo rate through 2021.