RBI Monetary Policy preview: MPC may not cut repo rate, RBI to keep inflation under close watch

Reserve Bank of India (RBI) will present its first bi-monthly policy for 2021-22 on April 7, 2021. The announcements by RBI on Wednesday will set the direction for monetary policy for the new financial year.

Reserve Bank of India (RBI) will present its first bi-monthly policy for 2021-22 on April 7, 2021. The announcements by RBI on Wednesday will set the direction for monetary policy for the new financial year. With the policy amid the second Covid-19 wave and fresh restrictions, buildup of inflationary pressures, and rising bond yields, the RBI’s announcement would be closely watched to see as to how it would support economic growth, control inflation and manage the governments sizeable borrowing amid rising yields along with the higher demand for credit from the private sector, analysts said on Monday. “We expect RBI to continue with the accommodative policy stance,” economists at CARE Ratings said.

Status quo on cards

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. “No change in the repo rate. The accommodative monetary policy stance would be maintained to address economic growth concerns,” CARE Ratings said in a report. While those at BofA Global Research said the RBI will remain on pause through FY22 and raise rates by 1 percentage point (100 bps) in FY23. Currently, the repo rate or the short-term lending rate is at 4 per cent, the reverse repo rate is 3.35 per cent, the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent.

In March 2021, the government had asked the RBI to maintain retail inflation at 4 per cent with a margin of 2 per cent on either side for five more years ending March 2026. “The MPC will likely maintain its previous tone that growth needs consistent firm traction and continued policy support is crucial for durable growth revival,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services. While the fourth quarter of financial year 2020-21 inflation estimate may be revised down a tad, the risks of increasing input costs and commodity prices, seasonal or new supply disruption-led upside in food prices and better pricing power could prod MPC to relook at its FY22 inflation forecast. Madhavi Arora also said that local lockdowns if persist, could impact services demand negatively and put downward pressure on first quarter of FY22 core inflation and act as a balancing factor to emerging upside risks to inflation.

Vaccine administration, higher headline inflation pushed up bond yields

The MPC in its upcoming meeting will continue to reaffirm the accommodative monetary policy despite the global increase in bond yields amidst concerns of a quicker than expected normalisation in the markets of developed economies, said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research. The continued progress on vaccine administration, higher headline inflation and prospects of further rise in the context of improving growth, have pushed up bond yields in most of the markets including India. “On the domestic front, the upward pressure on gsec yields is also driven by a sharp increase in sovereign borrowings and risks of higher inflation arising from the elevated retail fuel prices,” Suman Chowdhury added. Chowdhury also said that MPC is expected to support the ongoing but nascent economic recovery by extending the pause on interest rates for a longer period.

“We would expect the RBI to manage the government. bond yields within a corridor of +/- 20 bps from the current levels through the use of appropriate monetary tools including OMOs,” Chowdhury said. Any decisive move towards policy tightening is likely to happen only when the growth momentum in the economy is firmly established or average inflation structurally moves well beyond 6 per cent.

In line with COVID-19 vaccination-led optimism, 2021 has seen a rise in yields across the globe. In upcoming policy, MPC may continue to emphasize the importance of ‘orderly evolution of yield curve’ given benign inflation trajectory and second wave headwinds to nascent growth recovery, said G Murlidhar, MD & CEO, Kotak Mahindra Life Insurance Company Ltd. “While we don’t expect any action on the policy rate front, the existing accommodation and the on-going support to bond markets are expected to continue for a bit longer,” Murlidhar added.

During the last MPC of the previous fiscal, the central bank had kept the key interest rate (repo) unchanged for the fourth consecutive meeting, citing inflationary concerns.

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