MPC may hold back rate hike

Mumbai: The monetary policy committee (MPC) of the Reserve Bank of India (RBI) is likely to hold interest rates on Thursday to support economic recovery amidst the uncertainty triggered by the third wave of the pandemic. The six-member MPC will commence its three-day meet from February 8. This will be the last monetary policy decision for this fiscal year. However, there are some who do expect the MPC to hike the reverse repo rate.

Aditi Nayar, chief economist, Icra Limited, said, “We are expecting a status quo this time. Policy normalization is set to commence in April with a stance change and reverse repo hike. Subsequently, we see two repo rate hikes of 25 basis points each over the next two reviews given the lingering uncertainty caused by the third wave, we expect a status quo on Thursday. However, with inflation likely to remain elevated, the stance is likely to be changed in the April 2022 review.”

Mihir Vora, chief investment officer at Max Life Insurance, said, “Probably the MPC may wait and watch as an option as of now but there is also a 50 per cent chance of a 25 basis points repo rate hike. This is because inflation and the fact that bond yields have started moving up and globally oil prices are also quite high. So, to that extent, they have already started the normalisation over the past few months and there is some expectation to start with a 25 basis points hike.”

The key repo rate has been at 4 per cent since May 2020, an all-time low, even though bond yields have been surging after the central government announced higher-than-expected fiscal deficits for FY22 and FY23 with a large borrowing calendar.  In the budget for FY23, the government announced plans for wider-than-expected fiscal deficits for FY22 (6.9 per cent of GDP versus 6.8 per cent budgeted) and FY23 (6.4 per cent of GDP). But more importantly, it also announced a plan for greater-than-expected gross market borrowing at Rs 15 lakh crore. To make matters challenging for the RBI, inflation is on the higher side compared to most peers and crude oil price has surged to a seven-year high of $92 per barrel, but GDP and industrial growth rates have been weak and volatile.

Retail inflation during December 2021 hardened for the third successive month to 5.6 per cent. Inflation has become a key global concern. Already nearly 40 countries have raised policy rates by a median of 150 bps.

“Given the inflationary pressures in the economy, we expect the central bank to gradually tighten its monetary policy by raising rates and draining liquidity. But the high government borrowing plan could step into the way, delaying the RBI's policy normalisation process,” said Pranjul Bhandari, chief economist of HSBC Global Research.

D.K. Joshi, chief economist of Crisil, said, “The MPC may hint at changing the stance to neutral and hike the reverse repo rate by 25 basis points. This is because of a mix of domestic and global factors at play.”