RBI expected remain Positive on Economic Growth

RBI expected remain Positive on Economic Growth


The Wall Street brokerage expects the apex bank Reserve Bank of India, to overlook the retail inflation, which is expected to be a temporary feature, and thus remain positive in keeping the rates unchanged, in the forthcoming  Monetary Policy review when the MPC (Monetary Policy Committee) is scheduled to announce the third monetary policy review on August 6, amidst the continuing increase in retail inflation that has breached the 6 per cent upper tolerance level for the past two consecutive months.

  • The Bank of America’s Securities India House economists feel that the MPC would stick with a dovish pause in the August 6 policy, overlooking the ‘transitory hump’ in inflation. Thereafter, the normalisation path will depend on the evolution of growth, inflation and the pandemic. The RBI Governor it adds is expected to announce a dovish message and argue against a hasty withdrawal of monetary policy support. However, they warn an abnormally high crude prices may force the RBI to adapt to normalisation process sooner than later.
  • The repo rate has been at record low of 4 per cent since June 2020, after lowering it by 115 bps during the first half of the pandemic-hit year, and the reverse repo, which has become the effective rate given the surplus liquidity, at 3.35 per cent, after it was slashed by 155 bps during the same period, resulting in an asymmetric +25/-65 bps policy corridor.
  • The MPC is likely to revise up its FY22 average CPI inflation forecast slightly from the previous 5.1 per cent and flag potential upside risks. On the other hand, the MPC is also likely to retain the FY22 real GDP growth forecast at 9.5 per cent, with risks evenly balanced now.
  • On policy normalisation, the report said if there is no hard-hitting third wave but yet a sizeable outbreak occurs, the RBI is likely to meet its growth and inflation forecasts first.
  • Under such circumstances, both growth and inflation stay largely in line with RBI estimates. Then the RBI will continue to ramp up its variable rate reverse repo operations till the December quarter and even as it narrows the policy corridor to a symmetric 25 bps plus/minus.
  • It is observed that the monetary policy has turned to a neutral stance after Q2 of 2022, and repo rate hike beginning either in June or August 2022 policy review, post which there will be a calibrated tightening, taking the repo to 5 per cent by March 2023 and 5.5 per cent by December 2023,” said the report.
  • In case both growth revival and spike in inflation are sharper than expected, the normalisation process will be advanced by a quarter or two wherein the corridor will be normalized by end-2021, with RBI turning neutral in Q1 of 2022, yet the first repo hike will be only in Jun or August 2022.
  • But if growth is slower than expected and inflation is uncomfortably high, then RBI will be in a tricky spot. However, if elevated inflation is due to supply side issues, we expect the RBI to stick to its growth focus, said the report.
    But if there is a hard-hitting third wave, the report expects normalisation to be advanced further to Q4 of 2022, and begin to repo hike only from early 2023 and normalisation by December 2023 when it will be at 5 per cent.

Let us wait and see the results announced during the ensuing Monetary Committee meeting.

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