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RBI MPC Meet: Dovish Stance Likely

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The Reserve Bank of India (RBI) is likely to keep interest rates on hold and adopt a dovish policy stance. The Monetary Policy Committee is likely to vote in favour of keeping rates steady when the RBI announces its decision on Wednesday. Some analysts believe that the rates are likely to remain steady through the year.

Madhavi Arora, Lead Economist, Emkay Global Financial Services says, "The upcoming policy will see MPC re-emphasising its commitment to keeping policy accommodative for the foreseeable future and maintaining ample liquidity.

However, there will likely be some re-assessment of the growth outlook even as the RBI may not rush to reduce its FY22 growth forecast of 10.5% dramatically amid second wave and series of local lockdowns.

RBI MPC Meet: Dovish Stance Likely
 

While it is too early to gauge the impact of second wave on macro variables, we reckon the growth impact is unlikely to be of the same magnitude as last time. The MPC will likely maintain its previous tone that growth needs consistent firm traction and continued policy support is crucial for durable growth revival," she notes.

"While Q4FY21 inflation forecast may be revised down a tad, the risks of increasing input costs and commodity prices, seasonal or new supply disruption-led upside in food prices and better pricing power could prod MPC to relook at its FY22 inflation forecast.

However, local lockdowns if persist, could impact services demand negatively and put downward pressure on 1QFY22 core inflation and act as a balancing factor to emerging upside risks to inflation.

We are still less aggressive on inflation than the RBI but see core inflation outdoing headline inflation through most part of FY22, averaging 5.2%, same as FY21. While this could worry the policymakers, the policy stance will likely remain accommodative on both rates and liquidity front in CY21.

We maintain that fear of some segment of the market on resumption of policy normalization in FY22 are unfounded.

On the yield curve management, the RBI will again assuage markets and continue to ensure that no premature tightening of financial conditions would happen and yields uptick is managed smoothly.

 

We expect the RBI to get more accountable and action oriented as we move into FY22. The RBI will continue to strive fixing skewed yield curve and maintain its preference for curve flattening.

We see net OMO purchases to the tune of Rs4.5-5tn in FY22 amid elevated supply, some natural normalization of liquidity in FY22 and shifting out of banks SLR demand," says Madhavi Arora.

Read more about: rbi monetary policy
Story first published: Tuesday, April 6, 2021, 7:20 [IST]
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