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RBI Monetary Policy: Repo Rate, Stance, Inflation, Will Shaktikanta Das Surprise Market?

By: Anulekha Ray

Last Updated: October 08, 2021, 07:01 IST

All 60 forecasters in a Reuters poll said they see no change in the repo rate on October 8

All 60 forecasters in a Reuters poll said they see no change in the repo rate on October 8

RBI Monetary Policy, October 8: The market will keenly watch how India's central bank plans to manage liquidity amid low number of Covid-19 cases and rising global commodity prices

The Reserve Bank of India (RBI) is likely to maintain status quo on interest rates for the eighth time in a row in its upcoming bi-monthly policy scheduled on October 8. Rising commodity prices in the international market and the need to contain inflation at home will likely to force the policymakers to signal a less accommodative stance in near future, believed analysts.

RBI Monetary Policy Committee (MPC) had last cut repo rate by 40 basis points in May 2020 to 4 per cent to spur demand in the economy severely affected by Covid-19 pandemic. Since then, the central bank had kept the key lending rate or the repo rate unchanged at 4 per cent. However, the possibility of increasing the reverse repo rate cannot be ruled out. It is also widely expected that the central bank will continue to maintain its accomodative stance.

All 60 forecasters in a Reuters poll said they see no change in the repo rate on October 8. However analysts opined that due to rising inflation, RBI is expected to hike repo rate in April-June 2022.

“The Reserve Bank of India is likely to keep the key policy rates unchanged in its fourth bi monthly MPC meeting for FY2022 on Friday. While the RBI is expected to keep rates on hold and maintain their accommodative stance as of now they are expected to signal that they will start moving to a less accommodative stance at some point of time in the near future which would be in line with market expectations,” said Jyoti Roy – DVP, equity strategist, Angel One Ltd.

The market will keenly watch how India’s central bank plans to manage liquidity amid low number of Covid-19 cases and looming inflation. “The upcoming policy will be watched for the RBI’s stance on liquidity management. While the RBI may not shock the system with a reverse repo hike, the policy will be used as a lever to prepare markets for a gradualist approach toward normalisation through both communication and action. Markets will still be assuaged that no premature tightening of financial conditions will happen and the uptick in yields will be managed,” said Emkay Global Financial Services in a report.

With the rising pressure of inflation in the economy and falling upper, RBI may want to strike a balance between supporting growth by revisiting the inflation target. The RBI has projected the CPI inflation at 5.7 per cent during 2021-22 — 5.9 per cent in the second quarter, 5.3 per cent in third, and 5.8 per cent in the fourth quarter of the fiscal, with risks broadly balanced. CPI inflation for Q1 2022-23 is projected at 5.1 per cent. CPI inflation for Q1 2022-23 is projected at 5.1 per cent.

“Inflation has come off since the last policy, however, supply side constraints and fuel hikes are likely to be inflationary. Some global factors such as a crude price hike due to shortages in China and the UK and the Federal Reserve indicating that it is likely to begin tapering by the end of the year could cause volatility. The MPC will keep a watch on all these factors, with domestic growth and inflation likely to guide its policy stance. If the green shoots of economic recovery sustain, then it is possible to expect some steps in the latter part of the year on liquidity and the reverse repo,” said Shanti Ekambaram, group president — Consumer Banking, Kotak Mahindra Bank.

On real estate front, Ravi Subramanian, manging director and chief executive offcier, Shriram Housing Finance said, “We expect RBI to hold interest rates at the current level this week. The Home affordability level is among the best it has been in last 2 decades, with the home loan payment to income ratio at 27 per cent in FY21. The low interest rates coupled with improvement in the housing market is driving demand for affordable and mid-market home loans in tier 2 and tier 3 cities. Incremental credit offtake is showing some signs of improvement as the country has opened up, post lockdowns in 1HFY22 and low interest rates will augur well for the pandemic-hit Indian economy.”

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first published:October 07, 2021, 23:48 IST
last updated:October 08, 2021, 07:01 IST