Experts see status quo, will read between lines: BS monetary policy poll

The Reserve Bank of India (RBI) would not want to change its rates or stance in the August 6 monetary policy announcement, according to economists and bond market participants, who said they would pay attention to the language to gauge if the ultra-accommodative policies have run their course. 

The repo rate would likely remain at 4 per cent, the reverse repo at 3.35 per cent, and the stance would stay “accommodative”, expected all of the participants in a Business Standard policy poll of 15 economists and bond traders. There was no debate on this issue considering the six-member monetary policy committee (MPC) had shifted to a state-based monetary policy stance, contingent upon durable growth, which is quite some time away from now. 

But the flare-up in inflation has spoiled the mood, tying the central bank’s hands for more accommodation. Despite some emerging market central banks hiking rates to control inflation, RBI Governor Shaktikanta Das had expressed his willingness to look through such a “transitory” phase. 

Retail inflation came at 6.30 per cent in May, and 6.26 per cent in June -- both above the upper limit of the RBI’s target. Yet, the MPC cannot touch the policy rates to fight the price rise. What the RBI is doing, however, is to let bond yields rise. The 10-year bond yields rose from near 6 per cent to 6.20 per cent in July. Since yields are the reference rate for all the relevant rates in the economy, the rates are rising without being raised, said bond dealers. That strategy should continue for some time, even as from the official podium, the RBI governor may assure everyone of a softer rate regime. 

“It is important to look at the forward guidance in the policy. Amid the continuing debate over the inflation trajectory, it will be interesting to watch out for the use of the word “transitory” in guidance,” said Soumya Kanti Ghosh, group chief economic advisor, State Bank of India. 

“The policy should also make it clear that inflation is unlikely to move down from current levels until there is a material fuel price adjustment by the government. The RBI could make it palpably clear that a coordinated monetary and fiscal policy response should be the way forward and the fiscal policy must do some heavy-lifting now,” Ghosh said. 

Economists calculate every 10 per cent increase in fuel prices at pumps pushes up retail inflation by about 50 basis points. Much of the rise in fuel prices is on account of taxes. Owing to the pandemic, the government coffers were earlier running dry but the revenue stream has now started to improve. The goods and services tax (GST) collection in July was Rs 1.16 trillion, after slipping below the Rs 1 trillion-mark for the first time in eight months in June. 

"The growth projection is likely to be retained at 9.5 per cent. Growth ‘revival’ might be dropped from the MPC statement. Discussions on inflation persistence and expectations are likely to get prominence,” said Saugata Bhattacharya, chief economist of Axis Bank. He expects inflation projections to be raised to 5.4 per cent-plus for the fiscal year, from the central bank’s projection of 5.1 per cent. 

Senior economists, such as Indranil Pan of YES Bank, Upasna Bhardwaj of Kotak Mahindra and Abheek Barua of HDFC Bank, expect the inflation forecast to be revised upwards, while growth forecast to remain intact. ICICI Bank’s head of global treasury B Prasanna also expects an upward revision in the inflation forecast, leaving the growth forecast at 9.5 per cent. Madan Sabnavis, chief economist of CARE Ratings, said he would carefully listen to the commentary on inflation. 

“There would be status quo on policy rates, with focus still very much on growth, despite inflation rising above 6 per cent,” said Gaurav Kapur, chief economist of IndusInd Bank. 

“We would be looking for guidance on policy normalisation -- conditions under which the MPC would look to consider moderating surplus liquidity and eventually changing the accommodative stance. A revised forecast on headline CPI inflation and the trajectory of growth and inflation, facing the risk of a third Covid wave, would be other key variables to watch out for," Kapur said. 

The bond market would especially look at hints of normalisation, but traders expect it to be a long-drawn affair. “The bond market would be picking cues on how long the accommodative policy stance would continue. The market would also want clarity about the future inflation path amid high recent prints,” said Ram Kamal Samanta, vice-president, investments, Star Union Dai-Ichi Life Insurance. 

“There could be some tactic changes in the RBI’s communication this time to prepare the market towards normalisation. The MPC may give clearer guidance this time about the glide path, rather than keeping it open-ended, in sync with the ongoing pandemic situation,” said Soumyajit Niyogi, associate director at India Ratings and Research. 

“We would watch for a revision in inflation forecasts, changes in GDP growth estimates if any, and any change in the language for the timeline of maintaining the accommodative stance,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance. 

However, not all expect the RBI to come clean on a glide path guidance, as that can immediately translate into market rates rising. "Against the backdrop of the weak trajectory of growth and further risks in the form of uneven and patchy monsoon, and rising cases of Delta variant of Covid globally, the RBI will postpone the timelines for normalisation,” said Rupa Rege Nitsure, group chief economist of L&T Finance. 

“However, the RBI may sensitise market participants about the unfavourable external events and encourage them to lengthen the duration of liabilities and to keep the un-hedged forex exposure to the minimum,” Nitsure said. 

If there is a rate hike ahead, it will take at least till December to take effect, according to Shubhada Rao, founder of economic research firm QuantEco. She expects a reverse repo hike of 40 basis points between December and February, followed by a 25-basis point hike in the repo rate in the first quarter of 2022-23. 

“Overall, the focus will remain on growth. We would, however, keenly watch for the commentary on the 10-year benchmark yield as action indicates a comfort in a gradual move up in the yield. With an expected upward revision in inflation forecast, it may be inconsistent to expect an ultra-dovish tone," Rao said.