The Central bank could also provide commentary aimed at reining in bond yields and signal that its moving to normalise monetary consitions to avoid a future spiral.
The Reserve Bank of India (RBI) will likely keep its key interest rate and monetary stance unchanged when it announces the policy on Wednesday, according to an ET poll of economists and traders. The RBI Monetary Policy Committee is meeting December 6-8.
The central bank could also provide commentary aimed at reining in bond yields and signal that it’s moving to normalise monetary conditions to avoid a future price spiral, said the survey’s 23 participants.
Amid the renewed Covid threat from the Omicron variant and worries about restrictions, the MPC could choose to support growth over containing prices despite inflation concerns.
“Omicron has certainly pressed a pause button to the recovery to normalcy with an unknown unknown,” said Ashhish Vaidya, managing director and head of markets, DBS Bank India. “It is better to raise the reverse repo rate now and narrow the corridor instead of doing it later, as the inflation fears have become real.”
MPC to Discuss Prices, Economy, Monetary Conditions
The MPC will deliberate on prices, state of the economy and monetary conditions at its three-day meeting with the threat of economic recovery getting impacted due to new curbs on people movement. While India hasn’t announced any lockdown, many western countries have imposed travel restrictions after the new variant of Covid was identified.
Poll participants were unanimous in their contention that the key repo rate will remain unchanged at 4%. A majority said the central bank will maintain its accommodative stance on liquidity. About half forecast a rise in the reverse repo rate by at least 15 basis points to 3.5%; the rest said it would be unchanged. A basis point is 0.01 percentage point.
It may extend the Targeted Long-Term Repo Operations to infrastructure and ESG (Environmental Social Governance) projects to convince the market of its intention to support growth, they said.
Although the central bank hasn’t changed its ultra-loose monetary policy position since the outbreak of Covid in early 2020, it has been rowing back slightly on liquidity without overtly admitting that this is part of a normalisation process.
“Since October 1, the RBI has not purchased any bonds via any open market operations, and the GSAP (Government Securities Acquisition Programme) has been discontinued as well,” said Ananth Narayanan, professor of finance at SP Jain Institute of Management and Research (SPJIMR). “In effect, the Indian taper is already underway, even as the RBI retains the flexibility to conduct bond market operations as and when needed.”
Market rates have started inching up. The 14-day variable rate reverse repo auction Friday yielded 3.99%, 39 basis points higher than nine weeks ago before the October monetary review. The 364-day treasury bill yielded 4.15%, 34 basis points higher than the level on September 29. Some like Bajaj Finance and Housing Development Finance Corp. have raised deposit rates.
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