The Reserve Bank may remain less accommodative when the monetary policy committee (MPC) is expected to release its assessment and vote next fortnight as the economy is in a much better shape and slowly moving back to pre- COVID levels of economic activity.
To start with, it may raise reverse repo rates by a token 25 basis points or bps (one basis point is 0.01 per cent) when the MPC meets during December 6-8. The Reserve Bank of India has kept unchanged the policy repo rate- the at which it lends to bank unchanged at 4 percent and the reverse repo rate – the rate at which it borrows from bank at 3.35 per cent since May 2020 when it lowered policy rates sharply over two consecutive months in a row to revive the economy that was hit by the lockdown induced slowdown.
A paper published by RBI economists last week in its November monthly Bulletin said that ” Domestically, there have been several positives on the COVID-19 front, in terms of reduced infections and faster vaccinations. Mobility is rapidly improving, the job market is recouping and overall economic activity is on the cusp of a strengthening revival. Overall monetary and credit conditions stay conducive for a durable economic recovery to take root.”
“With the GDP data coming out next week, growth-inflation dynamics will be key in determining RBI’s decision on the timing of the first reverse repo rate hike” said Upasana Bharadwaj, economist at Kotak Mahindra Bank.
Most economists have forecast a 9 per cent upward growth rate for the economy in FY’22 with the possibility of it touching double digit levels if the current pace of revival in economic activity continues. An HSBC report estimates that the CPI inflation will remain above the central bank’s upper tolerance limit of 6 per cent. Goldman Sachs has forecast headline CPI inflation to increase to 5.8% yoy (average) in 2022 from 5.2% in 2021.
” Strong fiscal and monetary support, along with a rapid improvement in the pace of vaccination has helped nurture a swift economic recovery” said Rahul Bajoria, chief India economist at Barclays Capital. “With evidence that the economic recovery is well entrenched, policy normalization could be underway.” Barclays has forecast India’s economy expanded 9.6% year-on-year during July-September quarter on the back of low base and a gradual reopening of contact-intensive services.
“The RBI is currently in stage 2 (liquidity tightening) of the four-stage monetary policy normalization process that began with ‘less dovish’ comments from MPC members and will end with repo rate hikes” said Goldman Sachs in a report co-authored by Sanatanu Sengupta and Suraj Kumar.” In our view, the RBI will likely move to stage 3 (reverse repo hike) by the end of this year, and start hiking repo rates from Q2 2022. We expect a cumulative 75bp of repo rate hikes in 2022.”