The Reserve Bank of India (RBI) started its three-day monetary policy committee (MPC) meet on April 6 to decide on policy rates and stance amid elevated inflation and nascent economic growth. The MPC meet outcome is due on April 8.
Investors are closely watching the event to get a clue on what RBI thinks of inflation and growth and how it plans to begin the course of policy normalisation.
If we see it plainly, the RBI has little room to maintain the status quo as inflation prints have breached the upper band of RBI's tolerance level of 6 percent in January and February.
Inflation based on the Consumer Price Index (CPI), also known as retail inflation, rose to 6.07 percent in February from 6.01 percent in January. Retail inflation hit its fastest pace in eight months in February owing to higher prices of food and manufactured goods.
Managing inflation is one of the key responsibilities of the RBI MPC and RBI is mandated to keep the inflation rate within the range of 2-6 percent until March 2026. In 2001, the central government and the RBI had agreed to keep the inflation target of 2-6 percent for the next five years.
Section 45-ZA of the RBI Act, 1934 requires that the central government shall, in consultation with the RBI, determine the inflation target in terms of CPI, once in every five years.
The RBI seems to be in a tight spot even as the RBI governor Shaktikanta Das on March 21 said that the current spike in inflation is transitory and may moderate in months to come. Das said that the central bank does not see inflation going up beyond 6 percent and expects it would moderate to 4.5 percent.
Das reiterated that RBI would ensure there is abundant liquidity in the market for the credit system to function normally.
As many central banks of the developed countries have either begun or hinted at the start of the process of policy normalisation as the inflation is touching multi-year high levels, it will be interesting to see how RBI plans to begin rate hikes.
Status quo likely for now
Most analysts believe the RBI to maintain policy rates and stance and believe investors will focus on the governor's commentary on inflation and growth to get a clue on policy normalisation.
BofA Securities in its report said even as the RBI MPC revises its CPI inflation forecast, it may not resort to quicker or sharper policy repo rate hikes as it remains steadfast in supporting the growth recovery.
"We expect the RBI MPC to stay on hold on all rates on April 8 while retaining their accommodative stance. We then see the RBI MPC turning neutral in June alongside raising the reverse repo rate by 40bp, normalizing the policy corridor. Thereafter, as favorable base effects fade and CPI inflation rises further, we see the RBI MPC delivering their first repo rate hike of 25bp in August," said BofA Securities.
"In our opinion, given the deteriorating global growth outlook and its cascading impact on India’s growth recovery, there remains a limited scope for the RBI to tighten monetary policy at the current juncture. However, due to overwhelming risks to India’s inflation outlook amid a spurt in commodity prices along with tighter global financial conditions, we expect the central bank to revise its inflation forecast upwards and lay the ground for a gradual exit from their accommodative stance," said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research.
Chowdhury expects RBI to restore the width of the LAF (liquidity adjustment facility) corridor to its pre-pandemic levels by hiking the reverse repo rate by 40 bps over Jun-Aug 2022 policy review, followed by a cumulative 50 bps hike in the repo rate in the rest of FY23.
Ritika Chhabra, Economist and Quant Analyst at Prabhudas Lilladher points out while the consensus on the street is that RBI will most likely maintain the status quo on interest rates in this MPC meeting, we cannot rule out the possibility of a 25bps rise in the rates as inflation is showing no signs of easing in the near term.
The Russia- Ukraine war has exacerbated the inflationary pressures as these two countries are important suppliers of certain commodities, including oil, wheat, corn, palladium. The situation remains uncertain as peace talks between the two have failed to materialize and there is no resolution in sight. RBI might not let this ‘imported inflation’ overstay and face a similar precarious situation as the US Fed on being behind the curve in containing inflation, said Chhabra.
After Covid-19 hit the world, major central banks rushed to support the economy and market by reducing rates to historically low levels. RBI, too, slashed rates immediately and has been keeping them low to keep the system with abundant liquidity.
Now, when the Covid-19 concerns have eased and the inflation is getting unbearable, owing to factors including the Ukraine war, RBI may not be able to keep the rates low for a longer period.
"The RBI has been quite explicit in its stance of supporting growth. Hence, it is quite likely that it will delay rate hikes and prevent liquidity withdrawals as far out as it can. However, if inflation continues to inch up over the next few months, they may have to raise policy rates eventually. Accordingly, we expect no rate hikes in April," Rajesh Bhatia, MD & CIO at ITI Long Short Equity Fund told Mint Genie.
Growth is likely to remain RBI's focus area and it may not want to begin hiking rates to derail the country's economic recovery. Meanwhile, many rating agencies, such as ICRA, Fitch Ratings, India Ratings, OECD and Morgan Stanley have lowered India's growth forecast.
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