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RBI Monetary Policy: The Reserve Bank of India (RBI) may signal a Covid-era stimulus pullback: What to expect

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Economists expect RBI to lower inflation projections, after readings lowering expectations

The Reserve Bank of India is set to leave its key interest rate unchanged for eight straight meetings to support economic growth, while indicating the possibility of easing some pandemic-era stimulus to tackle inflation concerns.

As of Wednesday all 30 economists surveyed by Bloomberg expect the six-member Monetary Policy Committee to leave the buyback rate at four percent on Friday. However, the Reserve Bank of India’s big move is likely to be any move to balance the heavy liquidity in the banking system, possibly including easing the government bond-buying programme.

Governor Shaktikanta Das is scheduled to announce the MPC’s decision through a webcast on Friday at 10 am in Mumbai. Here’s what else to look for in his speech:

normalization path

With India’s economic recovery showing signs of strength and the energy crisis increasing inflation risks, investors are likely to see record liquidity in the banking system – given expected liquidity of more than Rs 9 trillion, more of the taper. You have to pay attention to the signs.

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photo credit: bloomberg

Traders, for one, will be looking for signals when the RBI intends to raise the reverse repo rate – the level at which it absorbs cash from banks. This will help reduce the gap between the main repo and reverse repo rates, which, according to Jayant Verma – the only dissatisfaction rate-setter in August – would indicate a gradual normalization path, while at the same time allowing the MPC to keep . The key rate is at a record low of four percent for a long time.

Sonal Verma, Chief Economist for India and Asia East-Japan at Nomura Holdings Inc., said, “Our expectation on the sequence of policy normalization in India is that it will begin with liquidity normalization, followed by a narrowing of the corridor, and then Actual rates will increase.” . in Singapore.

The central bank currently infuses liquidity through a 14-day reverse repo and economists at Citigroup Inc expect the RBI to extend the tenure, which will allow for the absorption of additional funds for a longer period. In addition, Citi expects the RBI to slow government bond purchases in the current quarter from Rs 1.2 trillion in the July-September period – which is the version of quantitative easing – to Rs 500 billion or less.

Analysts said the RBI could prevent infusion of liquidity by selling the same amount of smaller paper while buying bonds.

change in inflation

Economists expect the RBI to lower its inflation forecast after the recent readings, which are below expectations. Abhishek Gupta of Bloomberg Economics expects the forecast for FY22 to be reduced from 5.7 per cent now to an average of 5.3 per cent-5.5 per cent.

But there are risks to going up. A decrease in coal supplies, as well as a rise in oil and commodity prices, runs the risk of risking inflation. This could complicate matters for the RBI, which is already tolerating a price-hike in excess of its medium-term target of 4 per cent.

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photo credit: bloomberg

Pranjul Bhandari, Chief India Economist, HSBC Holdings Plc, said, “We are concerned about higher energy prices and a boost to inflation. in Mumbai. “We are also concerned about inequality-driven inflation as larger companies gain pricing power.”

pace of development

The latest factory and services procurement managers’ survey, consumption-tax data and import numbers show that the recovery from the pandemic-induced slowdown has accelerated. But given the considerable demand slack in the economy and the huge output gap in the manufacturing sector, everything is not hunky-dory.

And there is a possibility that the RBI may upgrade its growth forecast by a pencil to 9.5 per cent for the year beginning April 1, this is likely to be a touch-and-go decision with a major energy problem.

Rahul Bajoria, Chief India Economist, Barclays Bank Plc said, “Growth upgrade is not guaranteed, but RBI will signal more confidence on recovery.” “The Covid-19 wave is under control and the vaccination campaign has gained critical mass.”

(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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