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Economists see India holding interest rates this time too

By Anoop Agrawal

05:28, 7 December 2021

The emblem of Reserve Bank of India
Economists see India holding interest rates low – Photo: Shutterstock

The Indian central bank is expected to leave interest rates unchanged at the last rate-setting meeting for the year on 8 December, but a hike is imminent early next year, according to economists interviewed by

Five economists polled said the monetary policy committee (MPC) of the Reserve Bank of India (RBI) would leave the benchmark repurchase rate at a record low of 4%.

“Given the uncertainties associated with the scale of economic recovery, the RBI is expected to maintain its growth focus and continue with the accommodative monetary policy stance even as it moves towards gradual normalisation of support,” said Madan Sabnavis, chief economist at CARE Ratings.

“We expect the MPC to maintain the repo rate and reverse repo rate at a record low of 4% and 3.35% respectively. We do not foresee a policy rate hike before April 2022,” he added.

Curbing inflation

All the economists expect the central bank to increase interest rates next year as inflation remains firm and there is an overhanging risk of it flaring up because of the abundant cash available in the banking system.

The monetary policy committee has been tasked to keep retail inflation at 4% with an option to act if the rate rises to 6% or falls to 2%.

India’s consumer price-based inflation accelerated in October but was still below the central bank’s target range. The print for October was at 4.48%, ending a three-month falling streak year-on-year.

“The latest consumer price inflation also indicates that the weighted contribution of domestic inflation has been falling since July while that of imported inflation is rising gradually. Thus, inflation dynamics do not want a change in the policy currently,” said Soumya Kanti Ghosh, group economic advisor at the State Bank of India.

Retail inflation 

At its last meeting in October, the central bank lowered its retail inflation projection pace for the current financial year to 5.3% from an earlier estimate of 5.7%. It, however, said, “We are watchful of the evolving inflation situation and remain committed to bringing it closer to the target in a gradual and non-disruptive manner.”

Asia’s third-largest economy, expanded 8.4% on-year in the three months ended September, compared with a contraction of 7.4% in the same period last year.

The central bank has been trying to hold benchmark interest rates to help spur economic growth, which slowed to the lowest in forty years in the aftermath of the coronavirus outbreak in March 2020.

“Although the Q2FY2022 (second quarter of the financial year 2021-22) GDP growth is higher than the MPC’s forecast of 7.9%, uncertainty has been reignited by the Omicron variant,” said Aditi Nayar, chief economist at ICRA.

“We expect a status quo in the Dec 2021 policy review. However, the tone may shift, in order to signal an upcoming change in the policy stance to neutral in the February 2022 meeting,” she added.


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Liquidity moves

Any new or specific measures to drain cash from the system are not expected by financial experts who are closely watching the RBI. They expect the central bank to use existing tools such as bond sales to keep cash in the system. The surplus liquidity would be managed in a calibrated manner by reducing bond purchases.

The central bank in October had stated that it would take a calibrated step to ensure that cash in the banking system was just enough to meet growth targets without fanning inflation.

The rise in short term government bond yields was an outcome of active calibration of money market liquidity by the central bank, said Suman Chowdhury, chief analytical officer at Acuité Ratings Research.

The monthly average surplus in money market liquidity has been above INR7trn ($92.9m) for the past three months ended 3 December, up INR6.4trn in the previous three months.

“We expect the magnitude of liquidity absorption to potentially move up further as the central bank has also started to use longer tenors like the 28-day other than the standard 14-day debt auction,” said Chowdhury.

“With ongoing calibration of liquidity surplus acting as a precursor, we expect a hike in the reverse repo rate which is likely to be split between December 2021 and February 2022 policy reviews. The anticipated move in reverse repo rate from 3.35% currently, to 3.75% by February 2022 would help restore the width of the policy rate corridor to its normal level,” he added.

New variant policy

The latest policy statement would also delve into the evolving situation on the emergence of Omicron and its effects, according to the economists.

The variant has already spread across continents and reached India as well with two more cases of the variant detected in India on 6 December, taking the number of cases in the western state of Maharashtra to 10 and the nation’s tally to 23.

“Yet again, the virus has mutated, and with it, the likely permutations for 21 December RBI policy,” said Churchil Bhatt, executive vice president for debt investments at Kotak Mahindra Life Insurance Company.

Bhatt infers from experience that each subsequent variant had an incrementally less severe impact on economic activity, but he adds that there are no guarantees with Covid.

“Additionally, with inflation becoming a political issue, Global Central Banks are retiring their belief in the “transitory” nature of inflation. In contrast to the near term, Indian CPI is likely to remain within the MPC target band of 4 to 6%,” said Bhatt. 

“This, in turn, should give the MPC time to assess the medium-term implications of Omicron by continuing to maintain an accommodative pause in policy rates in December. Interest rates markets have re-aligned to this new reality and expected to remain rangebound around current levels in the absence of a policy surprise,” he added.

Read More: India’s fertiliser subsidy may rise by bn on input costs

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