RBI to resume rate hikes as inflation tolerance wanes. Analysts predict when
2 min read 13 Aug 2021, 04:39 PM ISTAnalysts believe Reserve Bank of India will start to roll back its accommodative policies that have led to easy liquidity conditions in the recent past
PremiumReserve Bank of India (RBI) has held the line for long, but its tolerance for high inflation seems to be running thin, analysts believe. This means return of interest rate hikes and rolling back of accommodative policies that have led to easy liquidity conditions in the recent past, they said on Friday.
Analysts believe that central bank could hike interest rates by the first half of 2022.
The views came a day after retail inflation for July were published, easing to 5.59 per cent. Inflation levels came down after staying above RBI's upper tolerance band of 6 per cent for two months.
Also Read: Retail inflation eases in July, factory output surges in June
On the same day, Finance Minister Nirmala Sitharaman stated that the existing conditions do not warrant withdrawal of the accommodative measures.
RBI has maintained the status quo on policy rates and an accommodative stance to help the economy recover from the impact of Covid-19 pandemic.
"The RBI has been tolerant of inflation and has stayed accommodative to support growth given the deep hit suffered by the economy. But it appears to be reaching the end of tether as inflation remains elevated," rating agency Crisil said.
"If this pressure (on inflation) continues and systemically important central banks, especially the (US) Fed, begin normalising, the RBI will start to roll back accommodation. We expect the RBI to make a more definitive statement by this fiscal end, and raise rates by 0.25 per cent," it added.
Acuite Ratings & Research Limited opined that policy normalisation will begin in a gradual fashion with comfort on vaccination, clarity on fiscal stance, and global rates setting. The agency called the increase in the quantum of variable reverse repo auctions as the first small step towards the same objective.
Next, the central bank can increase the reverse repo rate by 0.40 per cent to narrow the difference between repo and reverse repo rate to 0.25 per cent by February 2022, Acuite said, adding that the repo will be unchanged at 4 per cent.
In parallel, the vaccination drive is expected to lead to herd immunity and thereafter, the RBI will follow up with a 0.25 per cent rate hike in April 2022, it further said.
Japanese brokerage Nomura said monetary policy committee (MPC) review last week had signs of RBI policy pivoting towards normalisation. Its analysts pointed out that one of the members of the monetary policy committee dissented against the "accommodative stance" and the increase in FY22 headline inflation target to 5.7 per cent.
"The August policy meeting already bore initial signs of a policy pivot via calibrated liquidity normalisation. We believe this will be followed by the phasing out of durable injectors of liquidity, a 0.40 per cent reverse repo rate hike (in December quarter) and 0.75 per cent of repo/reverse repo rate hikes in 2022," it said.
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