US Fed keeps rate unchanged; A status quo also on cards in upcoming RBI policy

Currently, RBI policy repo rate stands at 4% and that of reverse repo rate stays at 3.35%.

Sep 18, 2020 08:09 IST India Infoline News Service

Rupee and Dollar
The US Federal Reserves decided to maintain its federal fund rate at 0-0.25% in the latest monetary policy announcement. Notably, the Fed also vowed to keep the rate near zero range until 2023. Although, the Reserve Bank of India (RBI) policy stance is not related to the US Fed's decision, however, a status quo is on the cards for India as well.

During the policy announcement, the US Fed committee asserted that it will be appropriate to maintain the policy rates in this target range until labour market conditions are consistent with the assessment of maximum employment and inflation averages 2% over time. Further, the committee also expects to maintain an accommodative stance until these outcomes are achieved.

Also, this would be the fourth consecutive policy where the US Fed decided to maintain the status quo after reducing the rate from 1.5-1.75% to 0-0.25% in March 2020.

CARE Ratings' in a research note highlighted that economic activities and employment have picked up in recent months from its depressed Q2-2020 levels but remain well below the pre-COVID levels. The US economy had contracted by (-)9.1% in Q2- 2020 reflective of weak consumer demand and limited business activities.

Giving outlook on US economy, CARE's note said, "The path of the economy is significantly contingent on the course of the virus. The ongoing COVID-19 pandemic is expected to weigh heavily on the economic activity, employment and inflation in the near term and pose considerable challenges to the outlook in the near term." Adding it said, "The path forward will also depend on the fiscal support by the Government."

GDP growth projections for the US economy have been sharply revised upwards from (-)6.5% to (-) 3.7% in 2020. The projections for 2021 and 2022 have been revised downwards to 4% and 3% respectively, said the note further.

Coming back to RBI policy, CARE's note said, "The RBI’s response is not linked with what the US Fed does. While global developments are examined, the decision taken by the MPC is based on the mandate i.e. inflation targeting."

Further, CARE said in the note, "The MPC is likely to keep the elevated retail inflation number (6.7% in August 2020) at the back of the mind when evaluating its decision in the next meeting. Retail Inflation has been well above the upper bound (6%) of the inflation target range for 5 consecutive months while growth has slipped quite sharply. The liquidity situation is comfortable while bank credit growth has been negative."

That said, CARE's note states under these conditions the RBI's decision may steer towards another pause in policy action.

Currently, RBI policy repo rate stands at 4% and that of reverse repo rate stays at 3.35%. While marginal standing facility (MSF) rate and the Bank Rate stood at 4.25%.

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