Five things to watch out for from RBI policy today

RBI Governor Shaktikanta Das will announce the policy decision of the Monetary policy committee today at 10 am

Mumbai: The Reserve Bank of India Governor Shaktikanta Das will announce the policy decision of the Monetary policy committee on Friday at 10 am, followed by a press conference at 12 noon. Here are the 5 things to watch out for.

Rate Action: The MPC is likely to keep policy rates unchanged despite the persistent rise in inflation and strong bounce back in recovery. A Mint survey had shown that 10 economists were unanimous in their view that the committee will maintain repo rate at 4% along with the accommodative policy stance. All the economists polled expect RBI to remain in wait and watch mode for the rest of the fiscal year, contrary to their earlier projection of a rate cut before year end. While they do not expect a rate cut, these economists expect MPC to retain the dovish forward guidance for the remaining year. MPC in its October policy had stated that it will continue with the accommodative stance as long as necessary up until the next financial year.

Growth: The latest gross domestic product (GDP) number showed that Indian economy saw a sharp recovery in the second quarter from the record decline of 24% in the previous quarter. GDP contracted by 7.5% in the July-September quarter, lower than the central bank’s prediction of 8.6% as per the nowcasting model, under which economic conditions are monitored in real time to make predictions. Market therefore expects RBI to revise the growth projection for the current fiscal year to around -8.5% from -9.5% earlier. However they expect RBI to adopt a cautious tone, flagging uncertainty about the resilience of demand after the festive season and downside risks due to rising infection cases.

Inflation: Inflation has surprised on the upside, remaining above the upper tolerance level of 6% for seven straight months now. Supply-side factors, such as unseasonal rains, labour shortages, higher services prices, higher commodity prices and higher taxes have contributed to a spike in both headline and core inflation. The market therefore expects RBI to revise up its inflation projection for the current fiscal year. Nomura expects a revision of more than 1 percentage points (pp) to 5.5-6.9% in H2 FY21 (from 4.5-5.4%) and a new H1 FY22 forecast of 4.2-4.8%. That said vegetable prices have started to ease, which will likely lower headline inflation in November and more sharply in December. However, other cost pressures in non-food items like freight, telecom, white goods etc will continue to keep inflation above the 4% target.

Liquidity: All eyes will be on whether RBI will review its ultra-loose liquidity policy as short term borrowing rates continue to remain below its benchmark policy rates. The yield curve has steepened since the October MPC due to the sharp drop in T-bill yields compared to the gradual fall in benchmark 10 year GSec yield. While the expectation is that RBI will address this dilemma in the upcoming policy, market participants remain divided. Some traders and economists believe that the central bank will announce measures such as market stabilisation scheme (MSS) bonds to sterilise this liquidity. This is because they expect the surfeit of liquidity to complicated pricing of risk for lenders. However others expect RBI to continue with its liquidity stance as it supports recovery by pushing consumers to invest.

MPC Voting Pattern: It will be interesting to note the voting pattern of the MPC members. In the last policy all members except Jayanth R. Varma voted to continue with the accommodative stance for an extended period, or at least till the next financial year, to revive growth on a durable basis while ensuring inflation is within the target. Verma had argued that the cause for India’s steep yield curve was due to the MPC’s wording of the forward guidance. The market will be keenly watching for the MPC members’ views on RBI’s liquidity stance, growth and inflation.

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