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While the consumer price index (CPI) inflation print for March 2021 is expected to harden to around 5.6%, the surge in covid-19 cases has doused the bullishness regarding India’s near-term growth outlook. Given this background, the monetary policy committee (MPC) has expectedly kept the repo rate unchanged at 4.0% in its first policy review for FY22, in line with its newly renewed primary mandate of ensuring that the CPI inflation remains within a band of 2-6%, while supporting growth.

The committee remarked that the CPI inflation trajectory is likely to be afflicted by both upside and downside pressures. It cited the bumper foodgrain production on the one hand, and the high international commodity prices and increased logistics costs on the other, while again nudging the central and state governments to pare taxes and cesses on petroleum products.

The MPC has now projected the CPI inflation at 5.0% in Q4FY21, 5.2% each in Q1FY22 and Q2FY22, dipping to 4.4% in Q3FY22 and rebounding to 5.1% in Q4FY22, with risks broadly balanced. The forecasts for H12022 and Q3FY22 are slightly higher than its February projections.

With the MPC forecasting the CPI inflation to average around 5.0% in FY22, rate cuts appear to be virtually ruled out, unless economic activity undergoes another deep covid-induced disruption. However, even in the latter situation, supply disruptions may cause inflation to spike, limiting the extent of the monetary policy support that may plausibly be forthcoming.

Simultaneously, early rate hikes seem rather unlikely, with the average retail inflation expected to remain below the 6% upper threshold of the MPC’s medium-term target range. Therefore, we maintain our view of an extended pause in the repo rate through 2021, and in the reverse repo rate during H1 FY22.

On the growth front, the MPC expects urban demand to strengthen with the covid-19 vaccine rollout, whereas rural demand would remain robust with record harvest. Higher government capital spending and the production-linked incentive scheme should help boost investment and exports as capacity utilisation revives.

However, given the uncertainty generated by the rise in covid-19 cases and the concomitant dip in consumer confidence, the committee maintained its projection of a real gross domestic product (GDP) expansion at 10.5% in FY22, with a base-effect driven sharp expansion of 26.2% in Q1FY22, giving way to more moderate growth rates of 8.3%, 5.4% and 6.2%, respectively, in the subsequent three quarters.

With the resurgence in localized restrictions, ICRA expects demand to get back-ended into H2FY22 from H1FY22, with GDP growth expected to print 10-11% for the year as a whole.

Importantly, the MPC has committed to continue the accommodative stance for as long as necessary to durably sustain growth, without providing any explicit time frame for the same. By doing so, it has signalled that it will remain data-dependent, going forward. We expect it to remain cautious, and continue the accommodative stance during H1FY22, until the uncertainty related to the growth outlook subsides, after a much larger portion of the adult population are administered the covid-19 vaccines.

The announcement of the secondary market government securities (G-sec) acquisition programme (GSAP 1.0) should help to subdue the anxieties of the bond market regarding the size of the central and state governments’ borrowing programmes for FY22.

Aditi Nayar is principal economist at ICRA Ltd.

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