With less than 3 hours to go for the Reserve Bank of India’s monetary policy decision, it's all boiling down to whether it will be a dovish hike or a hawkish pause. If they hike the rates, they will sound very dovish on the economy and in the future normalisation. If they don't hike, but keep rates as is, then they will be a little hawkish in how they normalise.
To parse the economy and the Monetary Policy Committee’s actions, CNBC-TV18 caught up with economists, Abhishek Upadhyay, Senior Economist, ICICI Securities Primary Dealership; Saugata Bhattacharya, Chief Economist, Axis Bank; and Pranjul Bhandari, Chief India Economist, HSBC.
When asked how the economy has changed compared to what it was when the MPC met in August, Bhattacharya said the signals are muddled. On the one side, there are signs that the economy has stabilised leading indicators in September, based on a small set, which seems to suggest that we are past the pre-COVID levels. But on the other side, many risks have arisen in the system. One is the global environment, particularly China. Exports were a very significant engine of growth when the MPC had met last in August, and that remains a concern because with China leading and some of the growth signals that we are seeing from the other developed markets, how much exports will continue, he added.
Domestic conditions, particularly now with the government appearing to spend more, domestic demand conditions might look a little better, if not immediately but over the next couple of months, particularly with the capex cycle moving up with government spending, with exports continuing for, at least for some time. The overall situation is that there are still many risks and they still maintain a 9.5 per cent growth forecast, but the risks are to the downside, said Bhattacharya.
On inflation, Bhandari said last time, the RBI had a very high patient forecast. However, inflation remains a big worry and does not think that the high commodity prices that we have seen through this year have been fully passed through consumers.
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“Our own sense is that the big companies who have gained pricing power in this pandemic have passed it on, but the medium and small companies haven't yet and now when they face another round of energy price increases, it will be very hard for them to take it on their bottom line and my sense is that as you know, vaccination rates rise, demand picks up, they will get the confidence of passing on more to consumers, and that would lift core inflation, which has been high through the pandemic, it's been 5 per cent or more and that is where the real pressure lies,” she said.
She added that we won't see this in the numbers in the next three months because next three months we have a favourable base protecting inflation. But it is there in the system and anybody who tracks month-on-month will see it and the RBI will not be able to escape it come January.
There has been Rs 11.9- 12-lakh crore surplus liquidity and daily absorption is at Rs 8.5-lakh crore. So, what do you expect RBI to do about liquidity? Upadhyay said, all the decisions which fall under the purview of MPC, we don't expect any tweaks there for repo rate, accommodative stance or forward guidance for accommodative stance. It is RBI that needs to walk back some of the exceptional accommodation it has delivered in the pandemic.
“Broadly three areas of focus for us in the policy in that context. Firstly, the G-SAP programme, RBI would vary of adding further liquidity. So, we would expect the G-SAP programme to be converted to a twisted kind of programme. This is already reasonable evidence that RBI is leading to that site based on their decision to convert the last two tranches of G-SAP 2 into twist options,” he said, adding that they would expect RBI to scale back the size of the programme itself. It was 1,20,000 crores in the last quarter this could come down by Rs 50,000 or Rs 60,000 crores which would mean a monthly average buying of about Rs 15,000 to 20,000 crores.
According to us, we may not get a quarterly schedule now and it is possible that RBI transitions to a monthly kind of programme, which would then give them the flexibility to transition to ad-hoc purchases either before or around the next policy or later.
The second thing is from a money market standpoint where already if you see money market yields have risen by about 20 to 30 basis points over the last month, primarily account of some high cut-offs we got in the variable rate reverse repo (VRRR) auctions. But we would expect RBI to continue to move towards its pre-pandemic liquidity framework, where they were withdrawing the majority of banking system surplus through VRRRs.
Currently, they are absorbing about 5.5 trillion through that route. We would expect, you know, that increases to around 7 trillion by the time of next meeting, said Upadhyay.
Finally, the macro forecasts which were discussed earlier, we don't think there will be any change to the growth forecast that stays at 9.5 per cent. There have been some comments by the Governor and the Deputy Governor recently in their speeches to that effect. The inflation we have to see but we expect fully a number to be revised down based on favourable surprises and October-December number will be lower. But we don't expect any major tweaks to January-March numbers or April-June numbers that they have printed, Upadhyay stated.
When asked what they expect in terms of rates and liquidity.
Upadhyay said they do not expect a change in reverse repo rate, which is the effective policy rate right now and bigger absorption through VRRRs.
Bhattacharya said G-SAP cut back, won’t make an impact on yield, the borrowing programme is much smaller. So, no change in rates but they will reduce the amount of G-SAP absorption.
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Bhandari said no change in rates. G-SAP programme to be suspended from here on and announce more VRRRs.
For the full discussion, watch the video