The Reserve Bank of India’s Monetary Policy Committee (
MPC) began its meeting on Wednesday, and it is expected that the committee would maintain the interest rates and continue with an accommodative policy stance to push the growth.
Meanwhile, the Budget has revised the fiscal deficit to 9.5% for FY21 and 6.8% for FY22, indicating that the government’s borrowings would be high and in such a scenario it would be difficult for the RBI to maintain low interest rates — to encourage banks to lend more.
Jyoti Prakash Gadia, Managing Director, Resurgent India, said, “We expect a status quo to be maintained by RBI, in policy rates, with a pause for the 1st quarter of the next fiscal… A shift from the accommodative stance may not emerge in the short run, as the position gets cleared on the inflation and interest rate benchmarks. The continued tilt in favour of growth, in the growth – inflation tradeoff is need of the hour and basic expectation.”
Since the last three meetings, the MPC has kept the rate unchanged at a record low of 4%, and the reverse repo rate is 3.35%.
Aditi Nayar, principal economist, Icra, said that despite a drop in inflation in December 2020, the trajectory remains unpalatable. “We expect an extended pause for the repo rate, with the stance to be changed to neutral in the August 2021 policy review or later, once there is clarity on the durability of the economic recovery,” she said.
Inflation is now back within the MPC’s target band, despite concerns over rising input costs, and the economy appears well poised for a growth recovery, believes Rahul Bajoria, Chief India Economist, Barclays.
“While the MPC will likely draw comfort from the favourable developments on growth and inflation, it will wait to gauge the sustainability before signalling a change in approach. Liquidity guidance may take precedence over policy guidance in the interim,” he added.
Meanwhile, the price pressures have also been softening and with retail inflation posting successive downward surprises for November and December, the MPC may draw some comfort from this situation. Against the central bank’s estimate of 6.8% in Q4 2020 inflation averaged around 6.4% YoY. In addition, the price decline in vegetables has continued in January, which may drive CPI inflation closer to 4% YoY.
Softening of CPI inflation also reflects easing of supply side constraints that affected food inflation.
Experts believe the MPC may ensure availability of adequate liquidity to stimulate investments in the infrastructure sector after the Finance Minister Nirmala Sitharaman, in her Budget 2021 speech, announced that the government would set up a dedicated infrastructure financing body.
The Gross Domestic Product (GDP) is projected to contract by 7.7% per cent in the ongoing fiscal year but is likely to rebound with a 11% growth in FY22, making for a “V-shaped” recovery, noted the Economic Survey 2021, taking cues from resurgence in high frequency indicators such as power demand, e-way bills, GST collection, etc.
It is also expected that the RBI may continue to hike banks’ held to maturity limits (HTM) till FY24 to fund high fiscal deficits without hardening yields. The RBI has already hiked banks’ HTM limit by 2.5% of book till FY22 to support recovery by enabling the Centre to run higher fiscal deficits.
“Banks will buy G-secs without fearing maturity to market (MTM) hits. RBI contains yields/lending rates by incentivising banks to invest the $80 billon money market surplus in G-secs without fear of MTM hits. As banks raise deposits at 5%, they would invest in G-secs at, say, 5.9% if exempted from MTM hits. It is fairly reasonable to assume that yields will rise over the next 12 months as growth normalises. Although we expect the RBI MPC to cut 50bp in 1H21, as inflation abates to the RBI’s 2-6% inflation mandate, we also see a 100bp hike in FY23. We are tracking December inflation at 5.2%,” said, Indranil Sen Gupta, India Economist, BofAS India.
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