Here's what to expect of the RBI Policy scheduled tomorrow
All 61 economists polled by Reuters said they do not expect any change in the repo rate, which has been steady at 4 per cent since May last year. But they expect the central bank to make two 25 basis point increases next fiscal year, taking the repo rate to 4.50 per cent by end-March 2023.
Many experts will, however, keep an eye on the RBI Governor's take on liquidity. The RBI has maintained excess rupee liquidity in the banking system, with the daily surplus exceeding Rs 6 trillion, to help the economy navigate the pandemic.
Manufacturing and services sectors, which contribute more than two-thirds of India's gross domestic product, have been going through a rough patch in the recent past.
The seasonally adjusted India Services Business Activity Index posted 45.4 in July, a third successive month in contraction territory amid subdued demand conditions. However, it rose from 41.2 in June, which suggests a slower rate of reduction.
Industrial production expanded but at a slower pace, growing 29.3 per cent in May from a year earlier, compared with almost 135 per cent in April. The sharp rise was on account of base effect as the country was under a strict lockdown during the same period last year. But more importantly, month-on-month industrial output fell 8.0 per cent from April.
Traders expect yields to rise further, but the central bank may intervene either directly or through some an open market operation to prevent a large uptick in yields and keep the government's borrowing costs in check.
The Monetary Policy Committee (MPC) has kept the key benchmark rates unchanged in the past five monetary policy meets. The banking regulator last cut its policy rates on May 22, 2020, in an off-policy cycle when the covid-19 pandemic first shook the country.
The Reserve Bank has slashed its key lending rates i.e. repo rate by 115 basis points since March 2020 to cushion the economy from the aftershock of coronavirus.
Meanwhile, last week, the International Monetary Fund (IMF) lowered India's growth projection from 12.5 per cent to 9.5 per cent for fiscal 2021-22 - down by three percentage points, following the severe second wave of COVID-19 pandemic in the country.
However, for the next fiscal 2022-23, IMF has revised the economic growth estimate for India from 6.9 per cent to 8.5 per cent - higher by 1.6 percentage points.