Despite the risk posed by the brand new Covid variant — Omicron — the Reserve Bank of India (RBI) is more likely to proceed with its plan on gradual exit from the ultra-accommodative financial coverage settings, specialists mentioned.
The near-term retail inflation is more likely to stay throughout the MPC goal band of 4 to six per cent. This, in flip, ought to give the Monetary Policy Committee time to evaluate the medium-term implications of Omicron by persevering with to take care of an accommodative pause in coverage charges in December. The MPC is scheduled to unveil the bimonthly coverage on December 8.
“While on-track recovery and above-target inflation make a case for policy normalisation, authorities are likely to be watchful of the new risk on the horizon — the Omicron variant. Notwithstanding the caution, we still expect a gradual exit from the ultra-accommodative policy settings to continue,” mentioned Radhika Rao, senior economist, DBS group.
“We believe the talks of a reverse repo rate hike in the MPC meeting may be premature as the RBI has been largely able to narrow the corridor without the noise of rate hikes and ensuing market cacophony,” mentioned Soumya Kanti Ghosh, group chief financial adviser, State Bank of India.
“We expect the RBI to continue normalizing high banking system liquidity by further adjusting quantum and tenor of existing VRRR operations. Interest rate markets have re-aligned to this new reality and expected to remain range bound around current levels in the absence of a policy surprise,” mentioned Churchil Bhatt, EVP debt investments, Kotak Mahindra Life Insurance Company.
Indications of the US Fed eradicating coverage help at a quicker tempo, to maintain inflation underneath test, are seen. This is aimed toward finishing the taper at an earlier date with a potential rise in rates of interest sooner. This can impression future methods of central banks. Covid can also be making a comeback in Europe and the brand new variant from South Africa doesn’t portend properly for the world financial system with prospects of lockdowns, thus once more forcing a reversal of insurance policies.
On the expansion entrance, whereas most financial indicators have surpassed pre-Covid ranges, there may be nonetheless lots of slack within the financial system. Hence, RBI might resolve to attend and watch until the following MPC assembly in February 2022. The RBI shall be involved about inflationary stress constructing within the financial system. Currently the upward stress on inflation is due to excessive commodity costs and provide bottlenecks. “However, with economic growth gathering momentum, there is threat of further demand side pressure on inflation. We can expect the RBI to start hiking rates from 2022. The 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,” mentioned Rajani Sinha, chief economist and nationwide director-research, Knight Frank India.
