Will He, Won’t He? Covid-19 Fuels Rate Cut Hopes as Shaktikanta Das Chairs RBI’s Policy Review Today

India's worsening economic outlook as coronavirus cases soar has raised hopes that the Reserve Bank of India (RBI) will cut interest rates at its policy review on Thursday, in spite of inflationary pressures.

The six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, is scheduled to announce its decision at noon at the body’s 24th meeting.

The fast-changing macroeconomic environment and the deteriorating growth outlook necessitated off-cycle meetings of the MPC — first in March and then again in May 2020.

The RBI had already reduced the repo rate by a total of 115 basis points since February, on top of the 135 basis points in an easing cycle last year, from 6.50%, responding to slowing growth.

The government has tasked RBI to keep inflation at 4 per cent (+, – 2 per cent). The central bank mainly factors in the Consumer Price Index (CPI) while formulating the monetary policy.

Annual retail inflation rose in June to 6.09% from 5.84% in March, remaining above the RBI's medium-term target range of 2%-6%. The inflation rate for July will be announced on August 12.

The RBI's recent policies have focused on financial stability and the need to support growth despite the price target.

The country was placed under one of the strictest lockdowns in the world in late March for over two months to halt the spread of Covid-19. The government gradually eased restrictions in June although infections continue to rise.

Analysts expect the economy to contract 20% in the June quarter versus the April forecast of a 5.2% fall and remain in negative terrain until the December quarter. For the full year 2020-21, the economy is likely to shrink 5.1%, which would be its weakest performance since 1979, a sharp contrast to the 1.5% expansion forecast in April.