Sat. Jun 10th, 2023
Spread the News, online news, Mumbai, December 8th, 2021: The Reserve Bank of India (RBI) is expected to maintain status quo on key rates in its bi-monthly policy statement, to be announced today, as the Omicron variant of the novel coronavirus poses risks to India’s economic recovery. The three-day review meeting of the six-member Monetary Policy Committee, or the rate-setting panel, of RBI, headed by governor Shaktikanta Das had begun Monday.

The committee is likely to keep policy rates unchanged citing uncertainty around growth recovery following the emergence of the Omicron variant. About 60% of respondents to a Mint poll of bankers and economists expect the RBI to maintain the reverse repo rate, the rate at which banks lend to RBI against government securities, at 3.35%. Only 40% expect a 15-20 basis points hike in the reverse repo rate. The market expects the RBI to maintain accommodative policy stance, but expects the policy tone to harden, signalling a change in the monetary policy stance to neutral in the February 2022 policy review.

The CPI inflation dropped to 4.3% in September from 5.3% in August, before rising mildly to 4.5% in October. That said, the central bank is likely to remain wary of the increases in food prices and persistent increases in various services costs such as telecom tariffs. A section of the market expects FY22 inflation forecast to be revised to 5.5% from the current 5.3%, given the larger-than-anticipated increase in October and November inflation momentum.

After holding its growth forecasts during the past two MPC meetings, RBI is likely to acknowledge the strong underlying growth momentum. India’s real GDP expanded 8.4% in year-on-year in Q2FY22, surpassing the MPC’s forecast of 7.9%. While 50% of those polled expect RBI to maintain the FY22 growth forecast at 9.5% to account for the potential downside risks from the spread of Omicron virus, the remaining 50% expect growth forecast to be revised closer to 10%.

The central bank has started reducing the liquidity excess in the system through instruments like the variable reverse repo rate or the VRRR. The average rates under recent VRRR auctions have risen to about 3.95%, which is close to the repo rate of 4%. Some economists expect RBI to explore new tools like standing deposit facility (SDF) based on which banks can park as much money as they want without getting collateral, and at a lower rate than the reverse repo.

The RBI kept rates unchanged and continued with its accommodative stance. In our view the policy is very dovish as the focus continues to remain on achieving durable growth with no indication of a possibility of tightening in the near term. RBI stated that economic activity is improving on expected lines – FY22 GDP growth forecast is retained at 9.5%. RBI expects inflation to peak by March quarter and soften thereafter due to supply side measures taken by the Central Government and excise duty cuts – FY22 inflation forecast retained at 5.3%. The central bank stated effective liquidity management framework will be undertaken as global financial conditions remains volatile and has retained the flexibility to undertake liquidity operations in a calibrated and orderly manner through VRRR. Overall, monetary policy stance is accommodative and committed to supporting growth.

Dr. Poonam Tandon, Chief Investment Officer, IndiaFirst Life Insurance Company Limited