RBI policy preview: With likely status quo on rates, market awaits growth and liquidity outlook


A poll conducted among 10 economists from India’s top banks and brokerages showed that the Monetary Policy Committee will hold the repurchase or repo rate at 4 percent in the June policy.

The Monetary Policy Committee of the Reserve Bank of India is expected to leave rates unchanged for the sixth consecutive policy amid uncertainty about the economic fallout of the second COVID-19 wave.
A poll conducted among 10 economists from India’s top banks and brokerages showed that the MPC will hold the repurchase or repo rate at 4 percent in the June policy. Repo rate is the rate at which the banks borrow money from the Reserve Bank. The MPC is also expected to leave the reverse repo rate, or the rate at which RBI borrows from banks, unchanged at 3.35 percent, the poll showed.
“The central bank looks set to keep all the key policy rates unchanged in June. More importantly, despite emerging signs of higher inflation prints, one expects the MPC to stay decisively growth supportive in the coming,” said Siddhartha Sanyal, Chief Economist at Bandhan Bank.
Eight out of ten respondents CNBC-TV18 polled said that the MPC will continue with a status quo on repo rates throughout the financial year.
On the reverse repo front, however, a majority expects a hike of anywhere between 25-50 basis points during the course of the fiscal.
“We expect the policy stance to remain unequivocally accommodative throughout the current financial year. While there is virtually no scope for a further cut in interest rates given the increased commodity prices and the rising WPI, the status quo on rates is likely to continue for a long time possibly till the end of FY22. Despite the risks of a build-up of inflationary pressures in the near term, RBI is likely to give higher priority to the concerns around growth recovery,” said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research.
With the second wave resulting in economic uncertainty, the odds of normalisation of policy and rollback of rate cuts seem low, and the focus has squarely shifted to the central bank’s measures to help economic recovery.
“The better-than-expected GDP numbers provide much-needed comfort to the MPC on the growth outlook.  However, with the imposition of partial lockdown-like restrictions to contain the virus spread in several parts of the country, the downside risk on growth recovery has intensified. Hence, the RBI is likely to continue with its accommodative monetary policy stance in the decision of the MPC meeting to be announced on 4 June 2021,” said Dr M Govinda Rao, Chief Economic Advisor of Brickwork Ratings.
Sixty percent of the respondents said that the RBI would slash its GDP growth forecast of 10.5 percent for FY22 to below 10 percent. Ninety percent said that the first quarter growth estimate of 26.2 percent would also be lowered, with a wide range of 12-25 percent given by various economists polled by CNBC-TV18.
The monetary policy statement will also be important to anchor inflation expectations, especially given the worry about rising inflationary pressures in what is a still-weak economy.  A majority of the economists polled said they expect RBI to retain the retail inflation forecast of 5.2 percent for the first and second quarter of the fiscal year.
All the respondents said RBI would continue to maintain its accommodative policy stance at least until the end of the calendar year, with half expecting it to be retained until March 2022.
The market is also watching for any announcement on the government securities acquisition programme or G-SAP. In the last policy in April, RBI said it would buy Rs 1 trillion worth of government securities by the first quarter of FY22 to keep the yield curve at comfortable levels. Several economists polled said they expect a GSAP 2.0 to be announced in the June policy.
Besides these, market participants will also watch out for any other announcements relating to regulatory forbearance, any relief measures for Covid-impacted sectors, other regulatory announcements from the Governor on Friday.

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