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RBI MPC | Status quo on rates, stance to continue; RBI, market need to be in sync on policy normalisation –

Several economists however said they expect the central bank to raise its inflation forecasts amid a rise in global commodity prices particularly crude oil (Image Source: Reuters)

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) that began its 3-day huddle on April 5 to decide lending rates and the decision on key rates, among others, will be out on April 7.

The RBI MPC, as widely expected and as indicated by the central bank in its previous meets, may maintain the status quo in order to keep the system adequately liquidated and help the economy sustain its growth trajectory.

The nascent economic growth and inflation dynamic warrant continued policy support from the RBI, especially when COVID-19 cases are rising at home.

The eyes, however, will be on RBI’s commentary on growth and inflation and how RBI sees the resurgence of COVID-19.

“The upcoming policy is against a backdrop of nascent recovery and fears of our country seeing the resurgence of the pandemic. The MPC members will yet another time have to do the tight rope walk in such a scenario, being mindful of stretching the elastic too wide,” Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund pointed out.

“The case for status quo and extended pause remains. The last thing the central banker would want to do is tweak policy amid uncertainty. The case for maintaining adequate liquidity and gradual normalising over time remains,” Iyer added.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research also concurs that the MPC will continue to reaffirm the accommodative monetary policy despite the global increase in bond yields amidst concerns of a quicker than expected normalisation in the markets of developed economies.

“Any decisive move towards policy tightening is likely to happen only when the growth momentum in the economy is firmly established or average inflation structurally moves well beyond 6 percent, something which we don’t foresee over the next 6 months. Given the current projections, we see the likelihood of a rate hike only in the last quarter of FY22,” said Chowdhury.

Edelweiss Securities is also on the same line about the rates. It expects RBI to leave rates unchanged and maintain an accommodative stance. The key monitorable, as per Edelweiss, will be any guidance on open market purchases (OMOs) or on long-term rates more generally.

Rates and the market

After the COVID-19 hit the global economies, central banks across the globe acted swiftly and brought interest rates at historically low levels to revive macroeconomic indicators.

While abundant liquidity cheered markets, pushing them to even record highs, it also gave birth to the concerns if the market will take it in a healthy way when central banks start to raise rates.

How the rates will be raised is a crucial thing and the central bank would need to ensure that the market is in sync with it, completely convinced that the rising of rates will not result in a liquidity crunch and derail economic improvement.

Experts are of the view that the RBI must try to bridge the communication gap on this front with the market.

“Markets appear sceptical about whether the RBI can steer a course to policy normalisation without a wrong turn. We believe it can and the MPC meeting on April 7 offers a chance to close the communication gap around how that process may unfold,” Rahul Bajoria, Chief India Economist, Barclays India said.

“We believe the RBI can maintain its monetary accommodation for a while in order to enable the recovery to become entrenched. Recovering output lost to the pandemic could take longer than anticipated, and policymakers will be best served by letting the economy run hot for a few quarters,” said Bajoria.

Bajoria believes the RBI will likely adopt a very gradual process of normalisation, augmented by moral suasion.

“Communicating an eventual exit from extraordinary accommodation will be a challenging exercise, with multiple stages. CRR normalisation has already begun, and it will be followed up with the removal of enhanced forward guidance, an increase in reverse repo rates to a ‘normal’ policy rate corridor of +/-25bp, followed by an eventual rate hike in Q2 2022 at the earliest, in our view,” said Bajoria.

RBI understands that the system needs abundant liquidity for a longer time.

In the previous policy meeting, the central bank reversed a 1 percent cut in CRR which was implemented after the outbreak of COVID-19, but it also mentioned that the move will provide it space to inject liquidity through other instruments such as g-sec purchases.

RBI decided to gradually restore CRR in two phases in a non-disruptive manner to 3.5 percent w.e.f March 27 and 4 percent w.e.f May 22, 2021.

“CRR normalisation will open up space for a variety of market operations of the RBI to inject additional liquidity,” RBI had said.

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