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Interest rates in India likely to stay stable until March, say leading economists

By Anoop Agrawal

11:27, 8 December 2021

Office of Reserve Bank of India where monetary policy is decided
Six economists surveyed see rate revision only in March. Photo: Shutterstock

Leading economists in India have told they do not expect to see interest rates rise in the country until at least March 2022 after the central bank signalled its intention to prioritise economic growth over fighting inflation. 

We spoke to leading figures at banks and ratings agencies in India after the Reserve Bank of India today decided to keep the benchmark repurchase rate (repo) unchanged at 4%. All those we spoke to expect the RBI to drain cash from the banking system by using bond sales and purchases to put the brakes on inflation. 

“Overall, the recovery that had been interrupted by the second wave of the pandemic is regaining traction, but it is not yet strong enough to be self-sustaining and durable. This underscores the vital importance of continued policy support,” RBI governor Shaktikanta Das said in a statement today.

India’s economy, the third-largest in Asia, expanded by 8.4% in the quarter ended September, rounding off four straight quarters of positive growth. The central bank today retained its projection for the financial year ending March 2022 at 9.5% expansion.

Biggest contraction in 40 years

The emphasis is on growth because in the year ended March 2021, the nation’s economy contracted by the most in 40 years – due to the impact of Covid-19.

The RBI has now kept the benchmark interest rate at the record low of 4% since February 2019, a period that takes in nine decision-making meetings. The monetary policy committee (MPC) expressed confidence over the growth trajectory and said it will monitor the evolution of the new Covid variant Omicron, and its implications on the global and domestic economies, in order to ensure that the early-stage recovery is not hindered.

“The Indian economy is relatively well-positioned on the path of recovery, but it cannot be immune to global spillovers or to possible surges of infections from new mutations including the Omicron variant. Hence, fortifying our macroeconomic fundamentals, making our financial markets and institutions resilient and sound, and putting in place credible and consistent policies will assume the highest priority in these uncertain times,” Das said.

The central bank chief has also given assurances that cash in the financial system will be kept at a level that supports sustained economic growth, broadly indicating that the liquidity will remain in surplus mode.

Price stability 

Aditi Nayar, chief economist at rating agency ICRA Limited, told us: “While a subtle shift has been brought in with the comment that price stability remains the cardinal principle of monetary policy, the overarching tone of today’s statement and forward guidance is less hawkish than we had anticipated.


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“The comment on managing a durable, strong, as well as inclusive recovery, underscores concerns of a K-shaped trend underpinning the traction in economic growth. With the MPC remarking that the ongoing domestic recovery needs sustained policy support to make it more broad-based, we now foresee a slightly lower likelihood of our base case assessment that the stance will be changed to neutral in the February 2022 policy review.” 

Some economists believe that, by emphasising economic growth today, the central bank has laid the foundations for a gradual withdrawal of its present stance sooner rather than later.

“Indeed, the MPC statement’s starting position is highly accommodative, and even though the RBI has prepared the ground for a very modest exit from its highly accommodative policy stance, we expect the RBI to keep growth risks front and centre in its deliberations. The RBI said the growth recovery is gaining traction, adding that India remains well placed to deal with Omicron risks now,” said Rahul Bajoria, chief economist at Barclays Plc in India.

Tackling inflation

There’s also a belief amoung the economists we spoke to that, while focusing on accelerating growth, the central bank will also gradually drain excess cash in the banking system to prevent a possible flare-up of inflation.

Consumer price inflation in October accelerated at 4.48%, after a 4.35% gain in September, and is not far from the central bank’s target. The authority is tasked with ensuring the inflation rate does not rise above 4%, and will hike or reduce the benchmark interest rate if inflation rises or falls by two percentage points from that level.

Dharmakirti Joshi, chief economist at CRISIL Ratings, said: “While headline inflation has come within the RBI’s target over the past few months, this has been primarily on account of a high base, especially for food prices. Non-food inflation also remains elevated.

“Although prices of crude oil, metals and costs of shipping have moderated over the past month, they remain significantly higher than last year. This, coupled with supply disruptions such as semiconductor shortages, has maintained pressure on producer margins. A pass-through of input-cost pressures to consumers, which was already happening in the past months, is likely to continue as domestic demand improves further.” 

Upside pressures

Churchil Bhatt, EVP Debt Investments at Kotak Mahindra Life Insurance Company Limited, told us: “In line with expectations, the MPC left policy rates unchanged and persisted with an accommodative stance, citing uncertainty around the new Covid variant. Despite the upside pressures on core inflation, the MPC drew comfort from the excise duty cuts, expecting CPI inflation to peak in Q4FY22.

“On the liquidity management front, RBI increased the quantum of existing VRRR (variable rate reverse repo) operations in a continuing effort to nudge the overnight rates higher towards the repo rate. Subsequently, we expect MPC to start hiking reverse repo gradually, beginning in February 2022.”

Abheek Barua, chief economist at HDFC Bank, said: “We believe the decision to maintain the status quo on reverse repo is a well thought-out move, though MPC is not empowered to act on reverse repo as per the RBI Act. Even though short rates at VRRR auctions have moved up and there are commentaries suggesting the RBI has already acted stealthily on rates, and hence an increase in reverse repo would have been a non event, such a perception is seriously misleading. It may be noted that overnight rates still hover around the lower end of the corridor.”

Read More: India’s central bank holds interest rates as expected

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