The Reserve Bank of India (RBI) will set its repurchase rate today for the next two months.
The decision arrives after the government of Prime Minister Narendra Modi released its budget for the upcoming year. The budget divests $23 billion from state-owned businesses and barely raises military spending while increasing expenditure on healthcare, infrastructure and agricultural subsidies. Modi’s tight budget has drawn criticism from economists given that the US and the EU have committed to deficit spending to weather the COVID-19 pandemic. However, Finance Minister Nirmala Sitharaman defended the budget on the grounds that too much spending would increase inflation.
For the same reason, the RBI is likely to keep the repurchase rate at 4%, where it has remained since last May. It marks the lowest set rate in the central bank’s history, reflecting the need to soften COVID-19’s blow to India’s struggling economy, which is likely to shrink by 8% this year. However, the bank is unlikely to set the rate any lower as India is also due for a 6.8% surge in inflation over the next quarter. The 4% rate may remain throughout 2021 and beyond unless inflation grows higher than expected.
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James is an analyst on the Current Developments Team, where he specialises in European and Indian politics. He is a regularly contributor to the Daily Brief