The Monetary Policy Committee (MPC) of the Reserve Bank is expected to hold fire as persistent high inflation and a lower-than-expected contraction of the economy leave no headroom for a rate cut.

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A CNBC-TV18 poll conducted among 20 economists showed that none of the respondents expected a repo rate cut from RBI in the December policy. The repo rate, currently at a historic low of 4 percent, is expected to be left unchanged.

Most economists CNBC-TV18 polled are not penciling in any cuts in this entire financial year, and expect rates to be cut only after March.

Half the respondents expect up to 25 basis point reduction in repo rate over a 12 month period, and 45 percent expect a status quo, meaning no cut or hike over the next year.

India’s GDP contracted by a lower than expected rate of 7.5 percent in the second quarter, better than RBI’s own assessment of an 8.6 percent contraction. This was a notable improvement from the 24 percent crash in the first quarter.

A majority of respondents to CNBC-TV18’s poll expect RBI to revise its GDP forecast for the fiscal from -9.5 percent to -7 to -9 percent in this policy, given the better than expected news on the macro front.

With the exception of March, inflation has consistently been above RBI’s mandated 2-6 percent target range this entire year. In its last reading, inflation was at a 9-month high of 7.61 percent in October. This is proving to be another big cause for worry for the central bank, which estimates that retail inflation will cool off to a 4.5 to 5.4 percent range in the second half of the fiscal. 55 percent of the respondents believe RBI may forecast CPI at 5.5 percent for the Jan-March quarter.

None of the 20 respondents to the poll expect a change in the MPC’s stance, but some expect the tone to sound more neutral as the headroom to cut rates has reduced.

While the rate decision for the Monetary Policy Committee would be relatively easy, taming the sustained higher inflation and most importantly, addressing liquidity will likely dominate the MPC debate.

Some of the economists polled said it is possible that the CRR or Cash Reserve Ratio, which was cut by 1 percent this March and was supposed to be rolled back only in March 2021, might be partially rolled back earlier. Some believe the RBI may consider using the standing deposit facility or SDF to manage extra liquidity. Under SDF, banks can park money with RBI without collateral, at a rate lower than the reverse repo.

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First Published:Dec 3, 2020 2:34 PM IST