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RBI Monetary Policy preview: MPC might not reduce repo price, RBI to retain inflation below close watch

Reserve Bank of India (RBI) will present its initial bi-month-to-month policy for 2021-22 on April 7, 2021. The announcements by RBI on Wednesday will set the path for monetary policy for the new monetary year. With the policy amid the second Covid-19 wave and fresh restrictions, buildup of inflationary pressures, and increasing bond yields, the RBI’s announcement would be closely watched to see as to how it would assistance financial development, manage inflation and handle the governments sizeable borrowing amid increasing yields along with the larger demand for credit from the private sector, analysts mentioned on Monday. “We expect RBI to continue with the accommodative policy stance,” economists at CARE Ratings mentioned.

Status quo on cards

Since March 2020, RBI has decreased repo prices to a record low of 4 per cent by way of two price cuts of 75 bps in March 2020 and 40 bps in May 2020. “No change in the repo rate. The accommodative monetary policy stance would be maintained to address economic growth concerns,” CARE Ratings mentioned in a report. While these at BofA Global Research mentioned the RBI will stay on pause by way of FY22 and raise prices by 1 percentage point (one hundred bps) in FY23. Currently, the repo price or the quick-term lending price is at 4 per cent, the reverse repo price is 3.35 per cent, the marginal standing facility (MSF) price and the Bank Rate at 4.25 per cent.

In March 2021, the government had asked the RBI to keep retail inflation at 4 per cent with a margin of 2 per cent on either side for 5 more years ending March 2026. “The MPC will likely maintain its previous tone that growth needs consistent firm traction and continued policy support is crucial for durable growth revival,” mentioned Madhavi Arora, Lead Economist, Emkay Global Financial Services. While the fourth quarter of monetary year 2020-21 inflation estimate might be revised down a tad, the dangers of rising input charges and commodity costs, seasonal or new provide disruption-led upside in meals costs and far better pricing energy could prod MPC to relook at its FY22 inflation forecast. Madhavi Arora also mentioned that regional lockdowns if persist, could effect services demand negatively and place downward stress on initial quarter of FY22 core inflation and act as a balancing element to emerging upside dangers to inflation.

Vaccine administration, larger headline inflation pushed up bond yields

The MPC in its upcoming meeting will continue to reaffirm the accommodative monetary policy regardless of the international improve in bond yields amidst issues of a faster than anticipated normalisation in the markets of created economies, mentioned Suman Chowdhury, Chief Analytical Officer, Acuité Ratings &amp Research. The continued progress on vaccine administration, larger headline inflation and prospects of additional rise in the context of enhancing development, have pushed up bond yields in most of the markets like India. “On the domestic front, the upward pressure on gsec yields is also driven by a sharp increase in sovereign borrowings and risks of higher inflation arising from the elevated retail fuel prices,” Suman Chowdhury added. Chowdhury also mentioned that MPC is anticipated to assistance the ongoing but nascent financial recovery by extending the pause on interest prices for a longer period.

“We would expect the RBI to manage the government. bond yields within a corridor of +/- 20 bps from the current levels through the use of appropriate monetary tools including OMOs,” Chowdhury mentioned. Any decisive move towards policy tightening is probably to come about only when the development momentum in the economy is firmly established or typical inflation structurally moves effectively beyond 6 per cent.

In line with COVID-19 vaccination-led optimism, 2021 has noticed a rise in yields across the globe. In upcoming policy, MPC might continue to emphasize the value of ‘orderly evolution of yield curve’ offered benign inflation trajectory and second wave headwinds to nascent development recovery, mentioned G Murlidhar, MD &amp CEO, Kotak Mahindra Life Insurance Company Ltd. “While we don’t expect any action on the policy rate front, the existing accommodation and the on-going support to bond markets are expected to continue for a bit longer,” Murlidhar added.

During the final MPC of the prior fiscal, the central bank had kept the essential interest price (repo) unchanged for the fourth consecutive meeting, citing inflationary issues.

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