Covid impact on growth in focus, RBI likely to hold rates

Amid fears of a resurgence of the Covid pandemic and its impact on the nascent economic recovery, the Reserve Bank of India (RBI) is likely to hold key policy rates unchanged and retain the accommodative stance in the monetary policy review next week, analysts and investment bankers said.

The Monetary Policy Committee (MPC) members, who will unveil the new policy on April 7, will have to do the tight rope walk in order to keep inflation under check and boost the growth. The MPC had retained the repo rate unchanged at 4 per cent and Reverse repo rate at 3.35 per cent in the previous meeting on February 5.

“We expect the RBI to keep rates on hold and maintain its accommodative stance at the upcoming meeting, as indicated by the MPC in the previous policy statement,” Morgan Stanley said in a report. Growth indicators have continued to improve since the last meeting, although the recent resurgence in daily Covid-19 cases poses risks to the growth outlook, it said. The RBI has forecast a 10.5 per cent growth in fiscal 2021-22.

“We are of the view that the case for status quo and extended pause remains. The last thing the central banker would want to do is tweak policy amid uncertainty. The case for maintaining adequate liquidity and gradual normalising over time remains,” said Lakshmi Iyer, CIO (debt) & head-products, Kotak Mutual Fund.

Raghvendra Nath, MD, Ladderup Wealth Management, said, “Currently, the RBI is faced with two pronged challenges, one is the rising inflation and the other is the rising borrowing cost for the government. Given the large borrowing program for the current fiscal year, lower interest rates would be preferable to contain the overall burden on the government.” The other pressure is stemming from the recent spike in global yields which may have an impact on FPI flows in the fixed income segment as well as the USD-INR equation.

Given the current dynamics of the economy and the focus on growth, the RBI is likely to maintain a status quo and continue with its accommodative stance to support the economy. “With the second wave of Covid currently impacting the country in a big way, the RBI would stay cautious to support growth. The market will also keenly analyze the RBI’s forward commentary to look for clues on the state of economy, inflation as well as yields,” Nath said.

Suman Chowdhury, chief analytical officer, Acuité Ratings & Research, said, “ MPC in its upcoming meeting will continue to reaffirm the accommodative monetary policy despite the global rise in bond yields amidst concerns of a quicker than expected normalisation in the markets of developed economies.” The continued progress on vaccine administration, especially in the US and the UK, higher headline inflation and prospects of its further rise in the context of improving growth, have pushed up bond yields in most markets including India.

On the domestic front, the upward pressure on G-Sec yields is also driven by a sharp increase in sovereign borrowings and risks of higher inflation arising from the elevated retail fuel prices. While the MPC would need to take cognizance of these factors, it is expected to support the ongoing but nascent economic recovery by extending the pause on interest rates for a longer period. “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 6.0 pc, something which we don’t foresee over the next 6 months. Given the current projections, we see the likelihood of a rate hike only in the last quarter of FY22,” Chowdhury said.

As per Moody’s Analytics, India is another economy where inflation is worrisome. India’s CPI inflation rose to 5 pc in February, from 4.1 pc in January. Food and beverage price growth gained 4.3 pc, from 2.7 pc in January. Food is a key driver of inflation, representing 46 pc of the CPI basket. Retail inflation has held above the RBI’s 4 per cent target for the past eight months.

Volatile food prices and rising oil prices led India’s CPI to exceed the upper band of 6 per cent several times in 2020, inhibiting the RBI’s ability to keep accommodative monetary settings in place during the height of the pandemic. Higher fuel prices will keep upward pressure on headline CPI and keep the RBI from offering further rate cuts.

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