Members of the Monetary Policy Committee (MPC), who will unveil the new policy on April 7, will have to walk a tightrope in order to keep inflation under control and boost growth. In its previous meeting on February 5, the MPC kept the repo rate at 4% and the reverse repo rate at 3.3%. “At the upcoming meeting, we expect the RBI to keep rates on hold and retain its accommodative stance, as indicated by the MPC in the previous policy statement,” Morgan Stanley said in a note. Growth indicators have continued to improve since the last meeting, but the recent resurgence in regular Covid-19 cases poses risks to the growth outlook, according to the study. The RBI has forecasted a 10.5% growth in fiscal 2021-22.
“We conclude that the argument for the status quo and an extended pause exists. The last thing a central banker wants to do is change strategy in the midst of turmoil. The case for preserving adequate liquidity and gradually normalising over time remains strong,” said Lakshmi Iyer, CIO (Debt) & head-products, Kotak Mutual Fund. “Currently, the RBI is faced with two-pronged challenges, one being rising inflation and the other being rising borrowing costs for the government,” said Raghvendra Nath, MD, Ladderup Wealth Management. Given the current fiscal year’s wide borrowing programme, lower interest rates will be preferred to keep the overall strain on the government to a minimum.” Another source of pressure is the recent rise in global yields, which may affect FPI flows in the fixed income segment as well as the USD-INR equation.
Fears of a revival of the Covid pandemic and its effect on the nascent economic recovery have led analysts and investment bankers to expect that the Reserve Bank of India (RBI) will keep key policy rates unchanged and maintain an accommodative stance in its monetary policy review next week. Given the current state of the economy and the focus on development, the RBI is likely to maintain the status quo and maintain its accommodative stance to support the economy. “With the second wave of Covid currently impacting the country in a big way, the RBI would stay cautious to support growth. The market will also keenly analyze the RBI’s forward commentary to look for clues on the state of the economy, inflation as well as yields,” Nath said.
According to Suman Chowdhury, a chief analytical officer at Acuité Ratings & Research, “the MPC in its upcoming meeting will continue to reaffirm the accommodative monetary policy, despite the global increase in bond yields amidst fears of a faster than expected normalisation in the markets of developed economies.” The continued progress on vaccine administration, especially in the US and the UK, higher headline inflation and prospects of its further rise in the context of improving growth, have pushed up bond yields in most markets including India.
Domestically, the upward pressure on G-Sec yields is being led by a strong rise in sovereign borrowings as well as the possibility of higher inflation due to elevated retail fuel prices. Although the MPC will need to consider these factors, it is expected to help the continuing yet tentative economic recovery by extending the interest rate pause for a longer period of time. “Any decisive step toward policy tightening is likely to occur only when the economy’s growth momentum is firmly developed or average inflation structurally moves far above 6.0 %, which we do not expect to happen in the next six months.Given the current projections, we see the likelihood of a rate hike only in the last quarter of FY22,” Chowdhury said.
According to Moody’s Analytics, India is another economy where inflation is concerning. CPI inflation in India increased to 5% in February, up from 4.1 % in January. Food and beverage price growth rose by 4.3% in February, up from 2.7% in January. Food is a major cause of inflation, accounting for 46% of the CPI basket. For the past eight months, retail inflation has remained above the RBI’s 4% mark. Volatile food prices and increasing oil prices caused India’s CPI to surpass the upper band of 6% several times in 2020, restricting the RBI’s ability to sustain accommodative monetary settings throughout the pandemic’s peak. Higher fuel prices would prevent the headline CPI from rising and the RBI from rising interest rates. Higher fuel prices will keep upward pressure on headline CPI and keep the RBI from offering further rate cuts.
