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RBI Policy: MPC to stay put amid uncertainty over rising infections, elevated inflation

Updated : April 07, 2021 06:34:38 IST

The Monetary Policy Committee (MPC) of the Reserve Bank is widely expected to pause in the April policy amid uncertainty around the growth impact of the second COVID-19 wave, and elevated inflation, a CNBC-TV18 poll among ten economists showed.

All economists polled said they expected the MPC to hold fire in the April policy, keep the repo rate unchanged at 4 percent. Repo rate, or the repurchase rate is the rate at which the central bank lends money to banks, and is a key tool used by RBI to manage inflation.

The reverse repo rate, which is the rate at which the central bank borrows from banks/rate at which commercial banks park their excess money with RBI, is also expected to be left unchanged at 3.35 percent, according to all the economists polled.

Eight out of ten economists polled said that the MPC will maintain a status quo on repo rates- ie. no cut or hike- for the entire calendar year 2021, but the reverse repo rate may see changes, according to the CNBC-TV18 poll.

Governor Shaktikanta Das, while announcing the policy in February, had said that the MPC had “unanimously decided to continue with the accommodative stance of monetary policy as long as necessary – at least through the current financial year and into the next year – to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward.”

Nine out of ten economists polled said RBI will continue with its accommodative stance at least until the August policy, or later.

“We expect the accommodative monetary policy stance to remain unchanged not only in the upcoming April policy but at least till the June policy, given the uncertainty posed by the sharp increase in Covid-19 cases within the country, which could slow down the pace of the current growth recovery, if localised lockdowns become more broad-based in the April-June’21 quarter,” said Kaushik Das, Director & Chief Economist, Deutsche Bank Research India.

M Govinda Rao Chief Economic Advisor, Brickwork Ratings added, “Given the rise in the spread of Coronavirus and the imposition of fresh restrictions to contain the virus spread in the major parts of the country, the RBI is likely to continue with its accommodative monetary policy stance in the upcoming MPC meeting to be announced on 7 April 2021. Considering the elevated inflation levels, BWR expects the RBI MPC to adopt a cautious approach and hold the repo rate at 4 percent.”

On the macro-economic parameters, eighty percent of the respondents said RBI would retain its growth outlook for FY21, projecting a 7.5 percent contraction. Ninety percent said RBI would also retain its 10.5 percent GDP growth outlook for FY22.

“We do not expect the RBI to change its FY22 GDP growth forecast from 10.5 percent though it is still much lower than our own forecast of 12.5 percent. The critical challenge would be for the MPC to assess the extent of output gap in FY22 as base effects would distort the conventional approach,” opined Samiran Chakraborty, Chief Economist at Citibank India.

Sajjid Z Chinoy JP Morgan's Chief India Economist added, “RBI is likely to acknowledge downside risks from a second COVID-19 wave, but we expect no change in its conservative 10.5% growth forecast for FY22.”

RBI projected consumer inflation at 5.2 to 5 percent for the first half of FY22, and at 4.8 percent for the third quarter of the fiscal. The majority of the respondents expect this to be left unchanged for now.

“RBI, in our view, has already taken a conservative forecast for CPI inflation in 1HFY22 and therefore we do not see any need to adjust the forecast higher at this stage. We expect the MPC to highlight potential upside risks to CPI inflation from rising oil prices (though the mark-to-marketing of higher global oil prices has already occurred when Brent rose close to USD70/barrel) and sticky core inflation momentum, but we don’t see any need for RBI to change its forecast at this stage,” said Kaushik Das from Deutsche Bank.

Economists said they focus more on the central bank’s comments around yield curve management, and its liquidity stance more than rates in this policy.

“While any policy rate action or change in monetary policy stance is unlikely at the April MPC meet, the focus would be on the stance on liquidity management and forward guidance. With uncertainty around the growth impact of the second Covid wave, the MPC is likely to remain abundantly cautious and continue its bias in supporting growth,” said Citibank’s Samiran Chakraborty. He added that RBI is likely to continue to assure markets of providing “ample liquidity”, even as it gradually hikes the reverse repo rate and reduces surplus liquidity in the system over time, and eventually rolls back some of the exceptional COVID relief measures, changes stance and hikes repo rates in future.

Shubhada Rao, Founder of QuantEco said, “OMOs will continue to remain a favoured tool to conduct yield curve control once again in FY22. Governor has already indicated a possible quantum of close to Rs 3 trillion of OMOs in FY22. The phased CRR restoration to 4 percent by May-21 end (already underway) will create space for liquidity injection via OMOs.”

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