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Omicron may press pause on interest rate hike

RBI may defer policy normalization plans to the next fiscal to avert a potential hit on the economy amid the spread of the Omicron variant (Photo: Mint)Premium
RBI may defer policy normalization plans to the next fiscal to avert a potential hit on the economy amid the spread of the Omicron variant (Photo: Mint)

With the recent surge in covid-19 cases and growing restrictions heightening uncertainty, it is increasingly unlikely that the MPC and RBI will embark on policy normalization next month unless inflation provides an acutely negative surprise, the likelihood of which is subdued, said Aditi Nayar, chief economist at ICRA

MUMBAI : India’s central bank may defer policy normalization plans to the next fiscal to avert a potential hit on the economy as the spread of the Omicron variant of coronavirus has already led some states to reimpose restrictions on economic activity, economists said.

Several economists, who had earlier forecast the Reserve Bank of India (RBI) to increase the reverse repo rate or the rate at which RBI borrows from commercial banks in its February policy, are revising their policy expectations, alongside growth forecasts.

“With the recent surge in covid-19 cases and growing restrictions heightening uncertainty, it is increasingly unlikely that the MPC and RBI will embark on policy normalization next month unless inflation provides an acutely negative surprise, the likelihood of which is subdued," said Aditi Nayar, chief economist at ICRA.

With states such as Maharashtra, Rajasthan, West Bengal and Delhi imposing night curfews and curbs on movement, economic activity is likely to be impacted this quarter. These states have already seen their daily confirmed coronavirus cases jump nearly threefold over the last week, signalling the start of a third wave of the pandemic in the country.

Additionally, the recent core sector output data, reflecting the output of eight core industries, also indicated slowing momentum in the economy. In November, core sector output expanded at 3.1%, sharply slower than the previous month’s 8.4%, as most sectors slowed, and cement and crude oil production contracted.

Similarly, many high-frequency indicators displayed flat growth in November from the year earlier, with supply disruptions caused by heavy rainfall in southern India. While most of the available indicators have seen a rebound in December, the growth momentum trails the levels seen in October.

“We formalize our FY22 GDP growth estimate at 9.6% (vs 10% with mild downside risks earlier). For FY23, we are estimating a growth of 7.5%, driven by a combination of continued rollover in pent-up demand along with an uneven pick-up in private capex in select sectors in H2," said QuantEco Research in a note.

Abheek Barua, chief economist at HDFC Bank, said the increase in coronavirus cases could impact this fiscal year’s economic growth by 40 basis points. “We have projected growth at 9.4% in FY22. While it is too early to estimate the dampening effects of Omicron-related containment, it is quite likely to pull the Q4 FY22 growth rate down. A tentative first estimate for FY22 that factors the Omicron impact would be 9%," he said.

Reserve Bank governor Shaktikanta Das had in the fiscal stability report in December cautioned that the Indian economy faces headwinds from global developments and the Omicron strain

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