The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India will unveil the crucial monetary policy on Thursday, with many analysts expecting the central bank to hike the reverse repo rate while retaining the key repo rate and accommodative stance. This is at a time when inflation remains at an elevated level and global central banks are on a tightening mode.
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Will RBI hike reverse repo rate?
The RBI is expected to start the process of normalisation of the accommodative monetary policy by increasing the reverse repo rate – the rate at which the RBI borrows money from banks – to reduce liquidity in the system. “Will there be a change in stance? Probably not this time though the hike in reverse repo rate will send signal of future direction of rates,” said Madan Sabnavis, Chief Economist, Bank of Baroda, adding that the RBI is likely to start the process of normalisation by increasing the reverse repo rate by 25 bps from 3.35 per cent.
Bond yields spiked after the government announced higher market borrowing of Rs 14.95 lakh crore in the next fiscal. “The time is now appropriate to go for a 20 bps hike on reverse repo rate, but outside the MPC meeting as enshrined in the RBI Act that clearly lays down that reverse repo is more of a liquidity management. A hike in reverse repo is also required as a larger corridor has resulted in rate volatility,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
Repo rate unlikely to change
Analysts said the central bank is likely to retain the repo rate – the rate at which the RBI lends funds to banks – to boost growth. The RBI reduced key policy repo rate by 115 bps to 4.0 per cent since February 2020 and reverse repo rates by 155 bps to 3.35 per cent. With this, banks have also reduced their interest rates (both deposits and lending) significantly. The large size of the FY23 market borrowings and with no progress on the inclusion of Indian debt market in the global bond indices yet begs the question whether the RBI might have to delay the liquidity normalisation in an effort to support the large borrowings programme, Ghosh said. “There will be no change in the repo rate this time even though we expect 50 bps hike next year,” Sabnavis said.
Is it time to change accommodative policy?
With the government accepting the mantle of reviving growth, the perception in the market is that the RBI no longer needs to prioritise growth over inflation. While the current stance of ‘accommodative policy for as long as necessary to revive growth’ needs to be changed, analysts said the RBI is likely to wait for some more time as the economic recovery is uneven and the Omicron variant has dented the sentiment.
The trend across the world is tightening of the liquidity with US Federal Reserve set to hike the rates soon. Given that the economy has recovered and does not need lower rates or higher liquidity, the MPC should change its monetary policy stance to neutral, said Arvind Chari, CIO, Quantum Advisors. MPC Member Jayanth Varma was not in favour of the MPC decision to keep the reverse repo rate at 3.35 per cent and voted against the accommodative stance in the previous policy review on December 8, 2021.
Will RBI focus on inflation now?
The RBI is likely to focus on inflation control as consumer price inflation crossed the 5.5 per cent mark after five months in December 2021, increasing by 68 basis points over the previous month. After softening from their elevated levels, crude oil prices have also started moving up, building the pressure on fuel inflation. The RBI would prefer the government to slash excise duty to ease the pressure on inflation.
Moreover, analysts say persistent supply issues are likely to increase cost push pressures, already evident in WPI inflation, which persisted in double-digit levels since the last nine months. Food inflation is also expected to increase further due to supply bottlenecks and adverse weather conditions on the back of the waning base effect. With oil prices above $90 per barrel and threatening to go higher, they should also mention that the MPC would now incrementally prioritise inflation and that the RBI should worry about financial stability over growth revival, Chari said.
Growth forecast to be cut or retained?
With the Covid pandemic impacting the recovery, there could be a slight downward revision in the GDP growth rate for FY22, analysts said. The RBI has projected a growth of 9.5 per cent for fiscal 2021-22 in the last policy review. Even as the economy has shown a revival, the first advanced estimate of GDP for the current fiscal shows that it has barely reached the pre-pandemic level.
In some contact-intensive sectors, the revival has been slow and is yet to reach the 2019-20 level. These are the sectors that are employment-intensive, and two years of the continuous drag has created a huge burden of unemployment. Virtually, all the growth engines, except public investment and exports, have been stuttering; both private consumption and investment are yet to revive, Brickwork Ratings said in a report.
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