The Reserve Bank of India's Monetary Policy Committee is expected to keep a status quo on key policy interest rates and accommodative stance in its upcoming policy review.
The Reserve Bank of India’s Monetary Policy Committee is expected to keep a status quo on key policy interest rates and accommodative stance in its upcoming policy review. The RBI will present its third bi-monthly monetary policy for FY22 on Friday, 8 October 2021. Since March 2020, RBI has reduced repo rates to a record low of 4 per cent through two rate cuts of 75 bps in March 2020 and 40 bps in May 2020. Since then, the RBI has refrained from taking any action on interest rates. This policy comes in the backdrop of a gradual improvement in the domestic economic conditions and increased pace of vaccination that is boosting consumer sentiments and confidence, analysts said.
RBI Governor Shaktikanta Das in the previous MPC meet decided to keep the repo rate unchanged and continue with the accommodative stance as long as necessary to support growth. At the same time, there is the looming spectre of rising global commodity prices that signals a surge in domestic inflation, analysts said on Tuesday.
- Central banks gear up for tapering; expect movement in equities, other assets may remain contained
- Rupee remains Asia’s top-performing currency; crude oil prices, dollar rebound to keep INR under pressure
- Bank Holidays October 2021: Banks to remain shut for up to 14 days from Oct 12; check full list here
Status quo on cards for 8th straight time
CARE Ratings: At the upcoming policy meeting, CARE Ratings does not expect surprises on the policy rate front at a time when the economy is expected to see the much-awaited boost in consumption triggered by festive demand. While the possibility of increasing the reverse repo rate cannot be ruled out it looks unlikely to be a part of this statement. The RBI’s announcement would however be closely watched to see how it addresses underlying and emerging concerns over price level, the rise in bond yields, and the surplus liquidity conditions.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities: The monetary policy meetings seem to have reached a stage where decisions from the RBI will be more keenly watched than what the MPC delivers. In the October meeting, the markets will be watching for RBI’s signals on addressing the liquidity glut along with the normalization of reverse repo rates. The MPC will likely continue to stick with the accommodative stance, for now, while keeping the repo rate unchanged. With a mixed bag in terms of both growth and inflation outlook, the RBI and MPC will want to wait for a clearer picture.
Surplus liquidity in the banking system
CARE Ratings: For the last two and a half years, the banking system has been flushed with surplus liquidity. This has now been facilitated by the low demand for bank credit along with an increase in bank deposits. In the current financial year (April-10 September), the fresh or incremental deposit inflows since end Mar 2021 have grown by 3.1 per cent, whereas the bank credit outflows have witnessed a degrowth of 0.3 per cent, indicative of low demand for credit, deleveraging by borrowers as well as risk aversion by bank. The liquidity surplus has widened to record highs and the RBI is seeking to rein in the excess liquidity. The liquidity surplus averaged Rs 7.9 lakh crore in September 2021, a notable increase from the surplus of Rs 4.9 lakh crore during April-June 2021.
Shanti Ekambaram, Group President — Consumer Banking, Kotak Mahindra Bank: Inflation has come off since the last policy, however, supply side constraints and fuel hikes are likely to be inflationary. Some global factors such as a crude price hike due to shortages in China and the UK and the Federal Reserve indicating that it is likely to begin tapering by the end of the year could cause volatility. The MPC will keep a watch on all these factors, with domestic growth and inflation likely to guide its policy stance. If the green shoots of economic recovery sustain, then it is possible to expect some steps in the latter part of the year on liquidity and the reverse repo.
Emkay Global Financial Services: The upcoming policy will be watched for the RBI’s stance on liquidity management. While the RBI may not shock the system with a reverse repo hike, the policy will be used as a lever to prepare markets for a gradualist approach toward normalization through both communication and action. Liquidity deluge dilemmas will continue. The RBI has so far focused on redistribution and repricing of existing liquidity via VRRR tenor/quantum/cut-offs. It has now finally moved a step ahead — reducing further active liquidity infusion by sterilization of its recent GSAP instalments with a simultaneous sale of bonds (OTs); possible higher intervention via the FX forwards route; and partly rolling over its maturing FX forwards book.
Latest inflation data to provide some relief to MPC
Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research: Unlike most developed and peer nations, the headline CPI inflation in India has moderated in Jul-Aug’21 due to lower food inflation and the short term outlook on inflation remains benign. While the spectre of high crude oil prices will continue to hold up the inflation risks, the latest inflation data will provide some relief to the MPC. Globally, the combination of elevated commodity prices, Covid related disruptions, vaccination progress, and policy support led economic revival have resulted in an acceleration in inflation in most of the developed and developing markets. This has started to lead to expectations of a readjustment in monetary policy.
Emkay Global Financial Services: Given the recent sharp downward surprises, the MPC will likely take comfort and lower the FY22 forecast, especially as Q2FY22 inflation looks to be running significantly lower than the RBI’s forecast (RBI: 5.9%). However, the MPC will likely caution on possible volatility in food prices later in the year amid an uneven temporal rainfall distribution, retail pass-through of the recent sharp rise in oil prices, and sticky/higher core inflation amid the possible percolation of input costs to output prices.