New Delhi: The Reserve Bank of India is likely to keep its key borrowing rate at an all-time low for a ninth consecutive meeting, with a new virus variant seen as the latest threat to the central bank’s efforts to return policy to normal.
All 28 economists surveyed by Bloomberg on Monday expect the six-member monetary policy committee to leave the buyback rate unchanged at 4% on Wednesday. Even bets on the reverse repurchase rate — the level at which the RBI withdraws cash from banks — have been skewed sharply toward a hold, underscoring the difficulty it faces in managing price pressures while supporting economic growth.
“Since the pandemic, the RBI has been doing exactly this balancing act, and the pandemic is not over,” said Soumya Kanti Ghosh, chief economist at the State Bank of India, the country’s largest government lender. “Against this background, it makes sense in the current situation to postpone normalization measures.”
Governor Shaktikanta Das will announce the decision of the MPC via webcast at 10:00 am in Mumbai on Wednesday. Here’s what else you should pay attention to in his speech:
Traders will still be looking for guidance on the inevitable return of policy to pre-pandemic settings, with markets pricing in a two-stage hike in reverse repo rate, starting Wednesday. Only seven of the 24 economists surveyed see this happening, others predict no change.
Shorter money market rates and front-end yields have already risen in recent weeks as the monetary authority increased cash withdrawals by increasing both the amount and duration of variable rate reverse repo auctions. The liquidity absorption steps coincided with the RBI’s cessation of the bond-buying program in October policy, signaling the beginning of the easing of stimulus in the pandemic era.
Expectations of an increase are “baked in swaps and bonds,” said Naveen Singh, executive vice president and head of trading at ICICI Securities Primary Dealership Ltd. reverse repo rate regardless of ommicron spread.”
The government bond yield curve in India was the steepest in a decade, largely due to the record surplus of bank liquidity that caused short-term interest rates to crash. The central bank’s moves to remove excess cash and halt bond purchases have in turn pushed cut-off yields on recent bond auctions, leading to higher market interest rates, according to Barclays Plc.
Inflation, which Das has repeatedly described as transient, is once again moving towards the top of the RBI’s 2 to 6% target range. Rising vegetable prices, especially tomatoes, and a declining favorable base effect could threaten the central bank’s forecast of 5.3% aggregate price growth for the fiscal year ending March.
Concerns about price pressures would certainly be a topic of interest, especially against the backdrop of comments from Federal Reserve Chairman Jerome Powell that it was time the Fed dropped its description of high inflation as “transient”. But that alone may not be enough to spur Indian policymakers into action now.
Five of the six MPC members were still in favor of accommodative policies in October to avert risks from global developments. With the ommicron variety spreading rapidly, this could be the reason why the RBI has to remain stale.
“The world is waiting for more data to understand the potential impact and efficacy of the existing vaccines against the omicron variant,” said Kunal Kundu, an economist at Societe Generale GSC Pvt. in Bengaluru. “If RBI also sees it as a threat to the nascent recovery, it may want to suspend plans for policy normalization.”
While the latest high-frequency indicators, from surveys of purchasing managers to data on consumption taxes, show that Asia’s third-largest economy has momentum, those gains could be wasted if the risks of omicron’s rapid spread materialize.
For now, the RBI is expected to maintain its growth forecast for the fiscal year ending March at 9.5%, while signaling downside risks.
“Headwinds from dwindling external demand, global supply bottlenecks, inflationary pressures and expected Federal Reserve winding down are likely to dampen the strength of the recovery,” said Bloomberg economist Abhishek Gupta, who recently raised the growth forecast for fiscal year 2022 from 7.8% to 8.9%. .