RBI MPC, inflation target, and slower pace of growth for services: Three things Teji Mandi investors should know on April 7, 2021
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RBI MPC Delivers No Negative Surprises

The RBI Monetary Policy Committee (MPC) in its first meeting of FY22 has kept interest rates unchanged. Governor Shaktikanta Das reiterated to keep the rates low till the economic recovery is well secured.

The committee has kept the repo rates unchanged at 4% since May last year. The reverse repo rate is also left untouched at 3.35%. The MPC has maintained its growth outlook for FY22 at 10.5%. However, rising COVID cases are seen as the biggest possible threat to this outlook.

The outcome of the meeting is entirely on the expected lines. It will ensure that abundant liquidity will continue to persist in the system.

In an ideal scenario, the RBI would have looked to wipe out some of the excess liquidity from the system. But, with the ongoing second COVID wave, the economy requires all the support that it could get. Hence, RBI had to put that plan on hold.

The Inflation Forecast

The Reserve Bank of India has revised its retail inflation estimate downwards for the fourth quarter. The central bank expects retail inflation to be at 5% in Q4FY21, against the earlier forecast of 5.2%.

The retail inflation estimate for the first half of FY22 is pegged at 5.2% and it is likely to remain moderate at 4.4% and 5.1% in Q3 and Q4 respectively.

The MPC has also noted that five out of 12 food sub-groups recorded double-digit inflation in February. While fuel inflation eased marginally, core inflation increased by 50 basis points and touched 6% in February.

Retail inflation is expected to stay high as India is pursuing aggressive growth targets. However, it has made the task of policymakers much tougher. High retail inflation has limited the RBI's ability to cut the policy rates further.

Service Sector Grows But at a Slower Pace

In March, the Purchasing Managers' Index (PMI) for services dropped to 54.6 from 55.3 in February. In PMI parlance, a print above 50 means expansion, and denotes contraction below it.

The survey further noted that Consumer Services, Finance & Insurance sectors remained in expansion mode, while Information and Communication, and Real Estate and Business Services related activities in contraction mode.

New export orders contracted for the 13th straight month. And, job losses also continued for the service sector in March.

The sharp increase in input cost spoiled the math for the majority of the service sector. The rise in input cost in March was the second-fastest since February 2013. It effectively ate into their margins as companies could not hike their fees due to the competitive pressure.

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