The minutes of RBI MPC February meet, released on February 24, echoed the pro-growth tone of the central bank at a time when inflation is high and the other major central banks of the world have started preparations for policy normalisation.
In the minutes of the February MPC meet, RBI deliberated that the recovery in domestic economic activity is yet to be broad-based, as private consumption and contact-intensive services remain below pre-pandemic levels. However, the outlook for the Rabi crop is a point of relief for the agriculture sector and rural demand.
Of late, the potential rate hike has been one of the biggest concerns of the market as policy normalisation may herald the end of the liquidity-induced market rally. However, the RBI MPC minutes indicate that the RBI may go for status quo at least till the next policy meet.
RBI appears to be ready to ignore inflation for some time and remain accommodative to sustain the growth. This seems to be pragmatic because the current situation is not conducive for policy normalisation owing to geopolitical concerns, higher crude prices and the threat of coronavirus pandemic.
“Growth is a bigger variable. If crude oil prices remain high for a long time and both domestic and global central banks pursue aggressive policies, it will do more damage to growth,” said Pankaj Pandey, Head Research at ICICI Securities.
“If we talk about geopolitical issues, our challenge is relatively lesser in comparison to other global economies. With the current setup, it is possible that even Fed may feel the need to temper the hawkishness. In these volatile times, you can't pursue a policy that will eventually damage growth. So, RBI may retain status quo on the policy rates in the next meet also," said Pandey.
The RBI believes that inflation is likely to moderate in the first half of the current financial year and move closer to the target rate thereafter, providing room to remain accommodative.
“The stout policy signaling in the MPC meeting and generally dovish minutes implies the central bank would go slow on policy transition. The geopolitical risks have risen substantially since the Feb’22 policy, and commodity price shocks could hit the economy hard if they persist. However, policymakers may not react immediately through the interest rate channel,” said brokerage firm Emkay Global Financial Services.
However, in the second half of the financial year 2022-2023 (FY23), the RBI may ponder hiking rates due to elevated crude oil prices and input costs.
“The MPC minutes clearly reinforce the dovish bias as noted in the February policy. While the recent February inflation reading was in line with our expectations and the trajectory may have peaked, we see 60-90 bps of upside to the second half of FY23 quarterly projections of RBI, accounting for the pass-through of higher crude oil prices and input costs, and persistence of supply-side disruptions in coming months,” said Kotak Securities in a report.
The recent escalation in geopolitical tensions will pose a further upside risk to inflation. However, the minutes, for now, reaffirm that domestic policy actions may be decoupled from global policy reaction functions in the near term, Kotak highlighted.
“We believe that RBI’s review of inflation trajectory for rest of FY23 in the June policy should be an inflection point for policy shift, which will be the key in determining the path of policy normalization. We maintain our call of 50 bps repo rate hike in FY23 (more skewed towards the second half of FY23), until then VRRRs and VRRs could remain key tools of liquidity management,” said Kotak Securities.
Brokerage firm Emkay Global pointed out that the RBI has some policy flexibility on hand, which will delay repo rate hikes.
"Amid ultra-elevated term premia, India’s current real rates look reasonable against emerging markets, given present crosscurrents. This could give some leeway to the RBI’s reaction function to conduct a shallow normalization,” said Emkay Global.
“Policy repo rate hikes will be well telegraphed and shallow, and easily pushed to the second half of FY23, with the RBI in an active wait-and-watch mode. The fixed Reverse Repo normalization may happen in tandem with a repo hike, even as it is becoming less irrelevant and will likely act more like a standing facility ahead,” Emkay said.