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Extra MPC meet likely, RBI may hold rates in February

The surge in inflation may lead to such an event. If inflation stays above the tolerance level, the MPC must take action. Although the MPC is mandated to meet at least four times, it can hold meetings more frequently.

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Last Updated: Jan 15, 2020, 11.24 AM IST
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(This story originally appeared in on Jan 15, 2020)
MUMBAI: The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) is likely to hold a consultation before its next bimonthly meet in February, given the surge in inflation beyond the panel’s tolerance level of 6%. While the MPC is unlikely to hike rates, the much-anticipated cut in February 2020 might not be forthcoming.

Economists are revising their earlier views of a rate cut in the RBI’s February 2020 policy and many now believe that the central bank will hold rates. The central government has notified in the official gazette 4% consumer price index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6% and the lower tolerance limit of 2%. If inflation stays above the tolerance level, the MPC must take action. Although the MPC is mandated to meet at least four times, it can hold meetings more frequently.

“December CPI inflation rose sharply to 7.4%, the highest in more than five years. This was also higher than 6.8% expected by HSBC. Previously, we were calling for a 25-basis-point (100bps = 1 percentage point) rate cut in February, which we are now taking off the table,” HSBC India chief economist Pranjul Bhandari said in a report.

“CPI inflation jumped to 7.35% in December on the back of a significant increase in ginger, onion and potato (GOP) prices. Stripping aside the GOP impact, the headline inflation declines to 4.48%. The impact of increase in telecom tariff has added another 16bps to inflation. We now expect inflation to breach 8% in January and then start bottoming out,” said SBI chief economic adviser Soumya Kanti Ghosh.

“We believe the RBI missed the bus in cutting rates in December. Our worry is that if the food price inflation does not mean revert, we can slip into stagflation. Our inflation trajectory shows headline will only materially decline beyond September, with December 2020-January 2021 inflation declining to below 3%,” added Ghosh.
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