RBI policy: Things to watch out for
Eight of a dozen economists polled by Mint expect RBI’s monetary policy committee to raise the reverse repo rate by 20-25 basis points to 3.55-3.6%. Only four economists expect the central bank to keep the reverse repo rate unchanged at 3.35%
PremiumNEW DELHI: The Reserve Bank of India (RBI) will announce its last bi-monthly monetary policy statement of the current fiscal on Thursday, after a three-day review meeting of the six-member Monetary Policy Committee, or the rate-setting panel, of the central bank, headed by governor Shaktikanta Das.
The policy statement is crucial, given that the Union Budget had announced a massive government borrowing programme and global central banks have begun withdrawing monetary stimulus.
Interest Rate & Stance
The MPC is likely to hike reverse repo or the rate at which RBI borrows from the market to absorb excess liquidity. Eight of a dozen economists polled by Mint expect RBI’s monetary policy committee to raise the reverse repo rate by 20-25 basis points to 3.55-3.6%. Only four economists expect the central bank to keep the reverse repo rate unchanged at 3.35%. This is in line with RBI’s efforts to suck out excess liquidity from the system. The central bank is, however, likely to maintain accommodative policy stance and repo rate unchanged at 4%. But it is expected to start preparing the markets for rate hikes later during the year as the US Fed is expected to raise rates by 75-100bps in 2022.
Inflation
Since the last policy, upside risks to core inflation have risen. With rise in oil and fertiliser prices, globally, upside risks to food inflation are also emerging. According to Barclays, Q3 inflation averaged at 5.0%, marginally lower than the central bank’s estimate of 5.1%. They expect inflation to stay at the upper end of the target band of 2-6% in the near term, and expect RBI to stay vigilant. That said economists are expecting RBI to maintain CPI inflation forecast for the current fiscal at 5.3%.
Growth
Some economists expect RBI to pare its FY22 growth forecast from the current 9.5% as the surge in Omicron cases has renewed uncertainty in growth momentum in the short term. In the December 2021 review, RBI had projected FY23 Q1 at 17.2% and Q2 GDP growth at 7.8%. Economic recovery also received a boost from the government’s big push for capex in the budget this time. This is likely to kickstart the private capex cycle, creating demand for fresh loans.
Liquidity
Yields have risen by 50 basis points since the last policy. The large quantum of government borrowing comes at a time credit growth is beginning to accelerate, and RBI needs to withdraw durable liquidity, resulting in demand-supply imbalance. RBI has shelved its bond purchasing programme (GSAP), and increased both the quantum and cut-offs for Voluntary Reverse Repo Rate (VRRR) auctions, as well as making some secondary market bond sales over the past month. According to Lakshmi Iyer, chief investment officer – debt, Kotak Mutual fund, “Given the mammoth borrowing for FY23 , there are hopes for RBI to Announce OT(operation twist) which could act as an anchor to long term bond yields."
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