Business strategy

Inflation, Surplus Management, Key Things to Watch Out for

The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) is expected to keep the key lending rate unchanged and maintain ‘accommodative’ stance on October 8. India’s central bank maintained the repo rate at record low 4 per cent for seven consecutive times in the past. There will be no change this time as well. During the previous meet, RBI Governor Shaktikanta Das said, that the central bank would “continue with the accommodative stance as long as necessary to support growth.” So there will no surprise in the policy stance as well. However, market watchers will keep an eye on RBI MPC meet on Friday for forward guidance. “The Monetary Policy meetings seem to have reached a stage where decisions from the RBI will be more keenly watched than what the MPC delivers,” Suvodeep Rakshit, senior economist, Kotak Institutional Equities.

The record number of Covid-19 vaccination at home, re-opening the economy and its V-shaped rebound to pre-pandemic levels will likely to prompt the RBI to gradually exit from the emergency monetary policy settings. The central bank may provide a sneak peak of a future road map to manage liquidity as the core liquidity surplus is steady near Rs 12 lakh crore. “There are implicit signs this is already underway, even as RBI’s policy guidance leans on the accommodative end of the scale. Liquidity management is in centre stage as the banking system surplus remains high, layered further by government’s cash balances, bond purchases and FX operations. A rise in the reverse repo cut-offs – within reach of the repo rate – at the recent auction, is also a signal of RBI’s discomfort with prevailing overnight and short-term yields, which was earlier held down by the liquidity surfeit,” said Radhika Rao, senior economist, DBS Bank, Singapore.

“In the October meeting, the markets will be watching for RBI’s signals on addressing the liquidity glut along with the normalization of reverse repo rates,” Rakshit added.

Inflation will be a concern for six-member RBI Monetary Policy Committee, especially when global crude oil prices touching a new high every day. 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.

“The last CPI print that the RBI factors into its decision making is 5.30 per cent. After averaging 5.6 per cent in Q1 FY22, we had expected the average to be at 5.2 per cent in the remaining of the FY22. However, these calculations would probably need to be marked up due to the higher global commodity prices. While a fresh assessment on inflation will be awaited, it is unlikely that the RBI would alter its inflation forecast from the current 5.7 per cent for the year as a whole,” YES Bank said in a report.

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