RBI may wait and watch, say economists; status quo likely on all fronts

The monetary policy on December 8 will be followed widely by analysts, for it may reveal the Reserve Bank of India’s (RBI’s) perception of a “behind the curve” fear chasing major global central banks, which no longer see inflation being “transitory”, while economic uncertainties are rising amid a new variant of coronavirus.

In a Business Standard poll of 16 economists and bond market experts, the consensus emerged of a status quo policy on the repo rate at 4 per cent, and the stance being “accommodative”.

However, analysts differ on the prospect of a reverse repo rate hike, now at 3.35 per cent, even as the weighted average reverse repo rate in auctions nears 4 per cent as the RBI tightens the extraordinary liquidity in the system.

While six expected a sure hike in the reverse repo rate, 10 said the rise of the Omicron variant might not allow the RBI to do that. One among the 10 said a reverse repo hike could be done outside the formal policy, because it is at the sole discretion of the RBI and not the remit of the six-member monetary policy committee (MPC)

The normalisation is part of a four-stage process the RBI started in the October 8 policy. The central bank stopped infusing additional liquidity by discontinuing the Government Securities Acquisition Programme (G-SAP), and gradually tightened excess liquidity by resorting to a variable rate reverse repo (VRRR) of seven days, 14 days, and 28 days, mopping up nearly Rs 6 trillion of excess liquidity from the banking system. Still, the liquidity in the banking system was at Rs 8.58 trillion, as of December 2.

International Monetary Fund (IMF) Managing Director Kristalina Georgieva on Friday said the Omicron variant might lead to a downgrade of the global growth outlook.

In a blog post, the IMF’s director of the monetary and capital markets department, Tobias Adrian, and Chief Economist Gita Gopinath wrote “for several emerging markets, including India, Indonesia, Russia, and South Africa, expectations show signs of being anchored”.

Sensing sticky inflation, several emerging market central banks have raised rates. The RBI refused to do so, stating that any hasty withdrawal would jeopardise the nascent recovery.

India’s retail inflation was at 4.48 per cent in October, while gross domestic product (GDP) grew 8.4 per cent in the second quarter.

If the Omicron variant does not cause widespread disruption, the full-year growth expectation of the RBI, at 9.5 per cent, can be met, economists said.

Upasna Bharadwaj, chief economist of Kotak Mahindra Bank, expects an upward revision of its inflation trajectory, “given the persistent supply-side constraints and the pass-through of higher input prices”, while the RBI could be expected to retain the growth outlook.

Soumyajit Niyogi, associate director at India Ratings and Research, said an indication of a glide path of normalisation “is very much needed with the caveat, given the sticky inflation”.

Indranil Pan, chief economist of YES Bank, however, does not see a change in the central bank’s inflation outlook, “as the lower taxes on petro products will be neutralised by the higher telecom costs”, while some comfort can be expected from lower global commodity prices now. Pan does not expect a change in the repo or reverse repo rates.

The emergence of Omicron has tilted the balance of probability towards a status quo policy, said Saugata Bhattacharya, chief economist of Axis Bank.

The central bank may wait to see the impact of the newly emerging Omicron strain.

“The MPC likely will opt for a cautious status quo, retain the ongoing accommodative monetary stance, and reiterate that it will watch the evolving context closely,” said Ananth Narayan, senior India analyst at the Observatory Group. He expects the reverse repo rate to remain unchanged.

Bandhan Bank Chief Economist Siddhartha Sanyal said while the headline macro numbers were improving, recovery was still nascent and uneven, and the best of corporate profitability was possibly behind us amid rising cost pressures.

On the other hand, Gaurav Kapur, chief economist of IndusInd Bank, expects a hike in the reverse repo rate even as the status quo on other fronts continues to nurse back the ongoing uneven recovery.

Bond market participants are factoring in a reverse repo hike.

“The RBI has already initiated a ‘stealth hike’ by sucking out liquidity through 14- and 28-day VRRR auctions. It could formalise this hike through a calibrated reverse repo hike of 15-20 basis points to begin the gradual restoration of the LAF corridor to its normal width,” said B Prasanna, group executive and head of global markets at ICICI Bank. 

Counterbalancing these, State Bank of India group Chief Economic Advisor Saumya Kanti Ghosh does not see a reason to use the policy platform for a reverse repo hike.

Tirthankar Pattanayak, chief economist of the National Stock Exchange, says while the focus continues to be guiding inflationary expectations through an uneven growth trajectory, a status quo can be expected.