The Monetary Policy Committee of the Reserve Bank of India is meeting on Dec 6-8, 2021 to decide on policy action. This time the policy meet takes place against a backdrop of the omicron variant of covid as well as high inflationary pressures.
Repo rates or interest rates to be on hold in the RBI Policy
Rajani Sinha, Chief Economist and National Director - Research, Knight Frank India, says: "RBI has started the process of normalization by mopping out excess liquidity from the system through enhanced VRRR auction and suspending the G-SAP. There was growing expectations that in the December MPC meeting, RBI would hike the reverse repo rate to narrow the corridor between repo and reverse repo rate. However, the new COVID variant Omicron has again pushed the global and Indian economy in a state of uncertainty and nervousness.
There is also added uncertainty of any knee-jerk reaction of Indian and global financial markets to Fed's monetary policy indication/action. In such a scenario, RBI in its upcoming meeting is likely to keep the rates on hold. On the growth front, while most economic indicators have surpassed pre-Covid levels, there is still a lot of slack in the economy. Hence RBI may decide to wait and watch till the next MPC meeting in February 2022."
Most economists expect the Reserve Bank of India to hold repo rates steady in their forthcoming meet, even while signalling further tightening measures.
RBI may hike reverse repo rate
While the country's central bank may keep the repo rate steady, there are chances that it might hike the reverse repo rate.
"RBI will be concerned about inflationary pressure building in the economy. Currently the upward pressure on inflation is because of high commodity prices and supply bottlenecks. However, with economic growth gathering momentum, there is threat of further demand side pressure on inflation. We can expect RBI to start hiking rates from 2022. RBI will also narrow the corridor between repo and reverse repo rate, with sharper hike in reverse repo rate. The quantum of rate hike will be dependent on how the COVID scenario pans out and its subsequent impact on economic growth in 2022," says Sinha.
However, many believe that the Reserve Bank of India may even wait for a while before deciding on hiking even the reverse repo rate. This is because the omicron variant of Covid-19 has bought along with it some fresh uncertainty. All in all, it is going to be a tricky affair for the country's central bank also given the fact that inflationary pressures in the economy are building.
Also, what is interesting is that growth too has been good with the Q2 GDP numbers coming in at good levels.
The RBI may continue to provide reasonable liquidity though. The Reserve Bank of India Governor, Shaktikanta Das recently said, "What we are doing is rebalancing the liquidity in the system. Also, the concept of monetary policy unwinding is too much misunderstood. Monetary policy normalisation after a long crisis period is not like rolling back a carpet..."
The policy announcement would be made on Dec 8 at 10 am.