As risks to growth arise from the current surge in Omicron infections and the consequent restrictions on activities, the Reserve Bank of India may delay rate hikes beyond its February policy, as growth takes priority over inflation, Economic Times reported. However, the central bank may use its additional liquidity management tools to reflect policy normalization.
Despite restrictions by states, increased mobility and a surging positivity rate may result in stricter curbs. Owing to the strong connection between economic activity and popular mobility indicators, a rise in Covid restrictions in Q4 FY22 is expected to have a negative impact on economic activities.
HDFC Bank has warned that its 6.1 percent growth forecast for the fourth quarter in the FY22 could shrink by 20-30 basis points. One basis point counts as 0.01 percent in this regard.
According to Abhishek Barua, chief economist at HDFC Bank, the return of uncertainty around growth and inflation as a result of the new variant's spread may result in the RBI's decision to raise the reverse repo rate in February 2022 being delayed.
Inflation is expected to touch double digits in India. The Reserve Bank will be looking for signs of long-term recovery.
Tanvee Gupta Jain, who works as an economist at UBS Securities, says if the spread of Omicron variant isn’t contained then it will contribute to near-term uncertainty.
According to Jain, the members of the Monetary Policy Committee are expected to be in a wait-and-watch mode at the February policy meeting, delaying policy normalisation until April.
In its most recent financial stability report, the RBI has voiced concern about the risk of increasing infections. The latest financial stability report reveals that more recent high-frequency indicators of economic activity indicate some loss of momentum in the third quarter of 2021-22.
According to Sonal Verma, chief India economist at Nomura, growing restrictions could disrupt the recovery in services that require a physical presence in the first quarter.
Sona also says that global experience indicates a lesser impact as compared to previous waves and a quick growth rebound once cases reach their peak.
(Edited by : Vijay Anand)