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Business News/ Economy / RBI policy briefing: Five things to watch out for

RBI policy briefing: Five things to watch out for

  • Reserve Bank of India (RBI) governor Shaktikanta Das on Wednesday will announce the August bi-monthly monetary policy statement at 10 am, which will be followed by a press conference.

As the MPC faces a growth-inflation trade-off, economists expect RBI to revise the average FY22 Consumer Price Index (CPI)-based inflation projection to around 5.5% from the earlier projected 5.1%.

MUMBAI: Reserve Bank of India (RBI) governor Shaktikanta Das on Wednesday will announce the August bi-monthly monetary policy statement at 10 am, which will be followed by a press conference. The statement will follow the three-day review meeting of the six-member Monetary Policy Committee, or the rate-setting panel, of RBI, headed by Das, had begun Wednesday.

Policy Normalisation

Since June 2019, RBI has maintained an accommodative policy stance to support growth concerns, while headline inflation remained below the MPC target. With consumer price inflation crossing the 6% upper band for two consecutive months and rising crude oil prices, concerns have emerged if the MPC will be able to maintain the accommodative stance for long. The central bank continues to believe that a hasty withdrawal of monetary policy support could disturb the economic recovery that is taking shape. Economists, therefore, expect RBI to commence policy normalization only by the fourth quarter of the current fiscal year. The bond market is however expecting RBI to announce increased tenor or higher quantum of variable rate reverse repo as a first step towards sucking out the surplus liquidity in the system. That said the market expects RBI to tread cautiously on this front to see orderly evolution of the yield curve.

Inflation Forecast

As the MPC faces a growth-inflation trade-off, economists expect RBI to revise the average FY22 Consumer Price Index (CPI)-based inflation projection to around 5.5% from the earlier projected 5.1%. Analysts expect RBI will see the recent spike in inflation as a “transitory phenomenon", driven by supply side factors and therefore not warranting monetary policy intervention.

Growth Forecast

Economic activity has revived since the last monetary policy review when RBI pruned growth forecast to 9.5% in June from 10.5% projected before. The recent data releases such as July GST collections, volume of E-way bills, PMI manufacturing, core index suggest that the economy is stabilising with the easing of restrictions in most parts of the country. According to economists, RBI will continue to be cognizant of the differential speed of recovery of the various sectors of the economy and the divergence between the formal and the informal sectors. RBI is therefore expected to maintain its FY22 GDP growth forecast at 9.5% in today’s meeting.

Yield Curve

The last MPC policy in June focused largely on yield management as the RBI tried to reinstate its stance on liquidity and sovereign premia by enhancing the G-Sec Acquisition Programme 2.0 to 1.2 trillion for Q2FY22. The RBI has been intervening in different segments of the yield curve since July, with an aim to target orderly evolution of the yield curve. The yield on the 10-year paper is currently trading near 6.20%, above the RBI’s tolerance level of 6%.

Rates and commentary

The Reserve Bank of India is likely to keep policy rates and policy stance unchanged amid fears of a third wave of coronavirus pandemic and the slow pace of vaccination. According to majority of economists, RBI’s monetary policy committee (MPC) will keep the key lending rate or the repo rate unchanged at 4 per cent for the seventh straight meeting. RBI’s commentary on the future trajectory of monetary policy will be keenly watched as economists expect RBI to sound more cautious about the inflation risks.

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ABOUT THE AUTHOR

Gopika Gopakumar

Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
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