The Reserve Bank will go for a "dovish pause" at Wednesday's policy review announcement amid developments such as a rise in inflation, government maintaining the inflation target band and a likely impact on growth due to local lockdowns on rising COVID-19 infections, analysts said.
The Reserve Bank will go for a “dovish pause” at Wednesday’s policy review announcement amid developments such as a rise in inflation, government maintaining the inflation target band and a likely impact on growth due to local lockdowns on rising COVID-19 infections, analysts said on Monday. Economists at American brokerage Bofa Securities said price stability, growth and financial stability will become the prime focus areas for the central bank going forward. “The RBI MPC (Monetary Policy Committee) should deliver another dovish pause on Wednesday,” it said.
The policy announcement, the first for the fiscal, will come days after the government maintained the RBI’s target to ensure inflation to be within 2-6 per cent band for five more years. Also, there has been a higher price rise to over 5 per cent after three consecutive months of cooling and the lockdowns like the one imposed by Maharashtra. The six-member MPC started its deliberations on Monday and will come out with a resolution on Wednesday. “Given the rise in the spread of coronavirus and the imposition of fresh restrictions to contain the virus spread in the major parts of the country, the RBI is likely to continue with its accommodative monetary policy stance in the upcoming MPC meeting,” Brickworks Ratings said in a statement.
According to the rating agency, the RBI will go for a status quo in rates. Endorsing the same view, its peer Care Ratings said the factors to watch out for in the policy will be steps to push economic growth, contain inflation and how the RBI proposes to manage the large borrowing programme of the government. “The recent surge in bond yields raises the cost of funds for the government and businesses alike. This would have adverse implications for the planned government borrowing programme for the year and for businesses whose fund requirements would increase with higher levels of activity,” it said.
The analysts at the American brokerage said the RBI will remain on pause through FY22 and raise rates by 1 percentage point in FY23. The RBI will likely try to fund the high fiscal deficit without adding to surplus liquidity or money supply growth through a USD 50 billion open market operations and long term repos in FY22, a three per cent hike in banks’ hold to maturity limits extended to FY26 interventions in forward forex, they said.
Brickworks Ratings said in a situation where inflation is higher than the 4 per cent median level, the RBI will have to be cautious in its policy action because it has already reduced the repo rate or its key rate of lending to the system by a cumulative 1.15 per cent last year. While it maintained status quo in its subsequent policy meetings, it has continued to infuse liquidity to keep the yields on government securities in check and to neutralise the surge in foreign exchange, the rating agency added.