Form of words:
Mumbai: The Reserve Bank of India will likely keep its prime lending rate at a record low for the ninth straight meeting, with a new virus version seen as the latest threat to the central bank’s efforts to normalize policy.
All 28 economists surveyed by Bloomberg as of Monday expect the six-member Monetary Policy Committee to leave the buyback rate unchanged at 4% on Wednesday. Even bets on the reverse repurchase rate – the level at which the RBI absorbs cash from banks – are heavily skewed towards a hold, underscoring the difficulty in controlling price pressures while supporting economic growth. does.
“Since the pandemic, the RBI has done this balancing act, and the pandemic is not over yet,” said Soumya Kanti Ghosh, chief economist at the country’s largest state-run lender State Bank of India. “Against this background, it is prudent to delay the normalization measures in the current situation.”
read also, RBI retains repo rate at 4%, keeps it unchanged for 8th consecutive time
normalization step
Governor Shaktikanta Das is scheduled to announce the MPC’s decision on Wednesday at 10 am in Mumbai via a webcast. Here’s what else to look for in his speech:
With the two-phase hike in the reverse repo rate starting Wednesday, traders will still be looking for guidance on the policy’s inevitable return to pre-pandemic settings. Of the 24 economists surveyed, only seven say this is happening, while others have predicted no change.
Short money market rates and front-end yields have already risen in recent weeks as the monetary authority increased cash absorption by increasing both the volume and duration of variable rate reverse repo auctions. The liquidity absorption move coincides with the RBI halting its bond buying program in October policy, which signaled the beginning of easing the pandemic-era stimulus.
“Expectations of this hike are “baked into the swap and bond levels,” said Naveen Singh, executive vice president and head of trading, ICICI Securities Primary Dealership Ltd., irrespective of the spread of Omicron reverse repo rate.
The sovereign yield curve in India has been the sharpest in a decade, largely due to record excess banking liquidity crashing into short-term rates. According to Barclays plc, the central bank’s actions in removing excess cash and halting bond purchases have pushed up the cut-off yield in recent bond auctions, resulting in higher market rates.
inflation concerns
Inflation, repeatedly described by Das as tentative, is once again moving towards the upper end of the RBI’s 2%-6% target range. Rising vegetable prices, especially tomato prices and a waning favorable base effect could threaten the central bank’s 5.3% headline price-growth forecast for the fiscal year ending March.
Concerns over price pressures will certainly be of interest, especially in the backdrop of comments by Federal Reserve Chairman Jerome Powell that it was time the Fed retired the description of high inflation as “transient”. But this alone may not be enough to prompt Indian policy makers to act now.
Of the six members of the MPC, five were in favor of keeping the policy stance favorable to offset risks from global growth until October. The Omicron version is spreading rapidly, which may be the reason why RBI needs to stand up.
“The world is waiting for more data to understand the potential impact and efficacy of existing vaccines against Omicron variants,” said Kunal Kundu, an economist at Societe Generale GSC Pvt Ltd. in Bangalore. “If the RBI also considers this as a threat to the nascent recovery, it may want to stop plans for policy normalisation.”
development risk
While the latest high-frequency indicators, from purchasing managers’ surveys to consumption-tax data, show that Asia’s third-largest economy is in momentum, the risks from Omicron’s rapid spread could ruin those gains.
For now, the RBI is expected to maintain its growth forecast for the financial year ending March at 9.5 per cent, while flagging downside risks.
“Slowdown in external demand, global supply constraints, inflationary pressures and expected Federal Reserve tapering are likely to dampen the strength of the rebound,” said Bloomberg economist Abhishek Gupta. , ,bloomberg
read also, Reserve Bank may increase rates on inflation from next financial year, predicts Goldman Sachs
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