The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will announce its policy decision tomorrow i.e. Friday, April 8, 2022. Market observers will be watching the governor’s revised economic projections and the interest rate trajectory. It is widely agreed that this will be one of the most crucial policies of recent times, amid uncertainties stemming from the conflict between Russia and Ukraine, commodity prices skyrocketing, oil boiling and perhaps for the first time since the pandemic, inflation has emerged as a bigger concern than growth for the Monetary Policy Committee (MPC).
Upside inflation risks, downside risks to growth
There are upside risks to inflation, downside risks to growth and an uneasy balance of payments scenario that faces India. So it’s the governor’s commentary that will be watched by Dalal Street on Friday.
“We expect the RBI MPC to revise its average CPI inflation forecast for FY23 from 4.5 percent yoy (yoy) and see downside risks to its real GDP growth forecast of 7.8 percent yoy. We ourselves see average CPI inflation in FY23 at 5.5 percent yoy (with upside risk of 30 basis points) and real GDP growth at 7.9 percent yoy (with downside risk),’ the BofA securities report said.
In February 2022, India’s retail inflation rate hardened to an eight-month high of 6.07 percent, from 6.01 percent in January 2022, crossing the 6.0 percent cap of the MPC’s 2.0-year forecast range. 6.0 percent for the second consecutive time. month.
Nomura said in a note from Aurodeep Nandi and Sonal Varma that the RBI is too optimistic about inflation and that a rate correction in monetary policy is warranted. It now expects a policy turnaround in June and is building 100 basis points of cumulative repo rate hikes in 2022.
D-Street in for a negative surprise?
But the Street could be in for a negative surprise if the RBI’s revised projections come in worse than what the market expects.
Vinod Nair, Head of Research at Geojit Financial Services, said: “Yes, it will come as a surprise to the market as the RBI is expected to maintain rates of this policy and raise the inflation forecast for FY23. It will negatively impact As the market assesses the change in stance since war and high commodity prices forego an aggressive policy, we believe this will be in the near term as yields are expected to rise at least 2 to 3 times in FY23.”
Meanwhile, bond markets are pinning their hopes on the central bank’s intervention to manage bond market liquidity during this week’s policy review.
Overall, the RBI is expected to extend its continued support for growth during its first bimonthly monetary policy of FY23. But if the global backdrop remains challenging, domestic policy making would come with trade-offs.
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