InvestorQ : Did the RBI not cut rates in its August monetary policy due to fears of high inflation?
Arti Chavan made post

Did the RBI not cut rates in its August monetary policy due to fears of high inflation?

Answer
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1 month ago


That is substantially true because inflation has been in a range that is outside the comfort level of the RBI. That is the reason, on 06 August when the MPC announced its policy, it opted to hold repo rates at 4% and reverse repo rates at 3.35%. Additionally, this decision was unanimous among all the 6 members of the MPC.

The policy has stated that there was little clarity on future inflation trajectory as the inflation data in the last few months has been largely skewed. As the MOSPI itself admitted, data points were not available in some cases and in other cases they were unrepresentative due to inactivity in the economy. The fear now is stagflation where growth is weak and inflation is high.

When the MOSPI released inflation data for the month of June, they also disclosed indicative inflation for April and May. In both months, the inflation level continues to remain above 6%. This is well above the target of RBI has of 4% inflation with leeway to stretch maximum up to 2% on the lower side and 6% on the upper side. RBI will wait for the latest monsoon data before taking a final view on inflation.

In reality, inflation is hitting real returns in India and that is an important reason why the RBI has opted to avoid cutting rates. Real yields are already negative and way lower than developed markets now. That explains FPIs selling Rs.115,000 crore in Indian debt in 2020. Lower inflation will also mean higher real yields and more flows.