RBI Policy Review: four things to watch out for – Mint

MUMBAI: Reserve Bank of India governor Shaktikanta Das will announce the by-monthly monetary policy statement at 10am, which will be followed by a press conference at 12 noon. The statement will follow the three-day review meeting of the six-member Monetary Policy Committee, or RBI’s rate-setting panel headed by Das, which had begun Wednesday.

Here are the four things to watch out for:

Rate Action & Commentary

The Reserve Bank of India will likely keep policy rates unchanged for the sixth straight meeting, amid fears of inflation adding to the impact of the second wave of covid infections. According to a Mint poll, majority of economists said the central bank will maintain its accommodative stance for as long as necessary to revive the economy from the pandemic. Economists expect RBI to start reducing the level of surplus liquidity, raise the reverse repo rate, and change its monetary stance to neutral from the fourth quarter onwards, once the vaccination reaches critical mass.

Economic Growth

The economic impact caused by the second wave poses a new set of challenges in front of the June meeting of the monetary policy committee (MPC). That’s why majority of economists expect RBI to revise its FY22 GDP growth forecast downwards by 1-1.5 percentage points from 10.5%. While the space for further rate cuts look limited, RBI is likely to continue with stimulus measures introduced during the response to the first wave. Market is expecting RBI to announce Government Securities Acquisition Program (GSAP 2.0) to counter the growth risks from the second wave. RBI could put the ball in the government’s court by stating that that monetary stimulus in the form of lower rates is unlikely to be effective and that direct fiscal intervention could be a preferred option.

Inflation

RBI may also keep a close eye on the upside risks to inflation. Rising input prices and supply disruptions due to the pandemic, especially in rural India, are adding to inflationary pressures. The rise in global costs of commodities such as crude oil, edible oil, metals and transportation have exacerbated domestic inflation. WPI inflation touched 10.5% in April, while consumer price inflation stayed within RBI’s range at 4.30%. The majority of economists polled expect RBI to retain the inflation target at around 5.2% levels.

Liquidity

Market will be watching for RBI’s commentary on managing liquidity and bond yields . Liquidity surplus has reduced by over 2 trillion over the last two months. The government is also expected to borrow an additional 1.58 trillion to compensate states for the goods and service tax shortfall through back-to-back loans like last year. Additionally, RBI has also restored the cash reserve ratio (CRR) to 4%, after it was cut last year as part of the liquidity measures. While the market is insisting on a higher yield, RBI is reluctant to sell it at a higher yield resulting in devolution of bond auctions. With the current account moving into deficit, economists expect the balance of payments surplus to fall and therefore RBI not have to purchase as many dollars as last year.

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