While economists do not expect the MPC to revise down its FY22 growth forecast of 10.5%, they expect the policy to highlight concerns amid the fresh wave of covid cases and localised lockdowns
MUMBAI: Reserve Bank of India (RBI) governor Shaktikanta Das on Wednesday will announce the first by-monthly monetary policy statement of fiscal 2021-22 at 10am, 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 Monday.
The Reserve Bank of India is likely to keep policy rates unchanged amid uncertainty created by a fresh surge in coronavirus infections. According to a Mint poll, majority of bankers and economists said the central bank is maintain its accommodative stance to entrench the recovery that has begun. Economists expect the RBI to stand pat on rates through fiscal 2022 and hike rates maybe towards the end of the current financial year or the next.
In the previous policy, the RBI had expressed its comfort in terms of growth amid improving capacity utilisation and reviving consumer confidence. While economists do not expect the MPC to revise down its FY22 growth forecast of 10.5%, they expect the policy to highlight concerns amid the fresh wave of covid cases and localised lockdowns. This could lead to a revision in RBI’s Q1FY22 forecast of 26.2%. Lead indicators point to a mild sequential moderation in activity.
Two of 10 polled participants expect the RBI to revise its inflation forecast for the second half of the next fiscal due to rising input costs, commodity prices and sticky core inflation. Economists also expect some impact on food prices and possible re-emergence of food supply disruptions due to localised lockdowns, which could prod the rate-setting panel to relook at its FY22 inflation forecast. RBI in its February policy had projected inflation at 5.2-5% for the first half of the fiscal 2022 and 4.3% for Q3FY22.
"There may not be much tinkering with inflation forecasts but reaffirmation of evolving both upside and downside risks," said Madhavi Arora, economist, Emkay Global.
The market, however, remains divided over when the RBI will start the process of liquidity normalisation. Some expect the central bank to keep liquidity accommodative for a longer period of time due to concerns about the impact of second wave on growth, and because of the large government borrowing programme. But there are others who expect the RBI to start start liquidity normalisation in the second half of this year depending on when the central bank feels more confident over the pace of economic recovery.
"We expect the process of liquidity normalisation to begin in mid-2021, the policy stance to shift to ‘neutral’ from ‘accommodative’ in Q3 (July-September), and a 25 basis points reverse repo rate hike in Q4. This is likely to be followed by 50 bps worth of repo rate hikes in first half of 2022, with risks skewed towards further hikes," said Sonal Varma and Aurodeep Nandi, economists, Nomura said in a note on 16 March.