Indian Central Bank May Signal Stimulus Pullback: Decision Guide
(Bloomberg) -- India’s central bank is poised to leave its key interest rate unchanged for an eight straight meeting to support economic growth, while likely signaling readiness to unwind some pandemic-era stimulus to tackle inflation concerns.
All 30 economists surveyed by Bloomberg as of Wednesday expect the six-member Monetary Policy Committee to leave the repurchase rate at 4% on Friday. The big takeaway from the Reserve Bank of India, however, is likely to be any move to balance the huge liquidity overhang in the banking system, including possibly trimming a government bond-buying program.
Governor Shaktikanta Das is scheduled to announce the MPC’s decision through a webcast at 10 a.m. in Mumbai on Friday. Here’s what else to watch for in his speech:
Traders, for one, will be looking for cues on when the RBI intends to raise the reverse repo rate -- the level at which it absorbs cash from banks. That should help narrow the gap between the main repo and reverse repo rates, which according to Jayanth Varma -- the sole dissenting rate-setter in August -- will signal a gradual normalization path, while at the same time allow the MPC to keep the key rate at a record low 4% for longer.
“Our expectation on sequencing of policy normalization in India is that it will begin with liquidity normalization, followed by narrowing of the corridor, and then actual rates liftoff,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings Inc. in Singapore.
The central bank currently mops up liquidity through up to 14-day reverse repos and economists at Citigroup Inc. expect the RBI to increase the duration, which will allow absorption of excess funds for a longer period. Besides, Citi expects the RBI to slow government bond purchases -- its version of quantitative easing -- to 500 billion rupees or lower in the current quarter from 1.2 trillion rupees in the July-September period.
The RBI could also prevent adding to liquidity by selling an equivalent amount of shorter papers when its buys bonds, analysts said.
Economists expect the RBI to trim its inflation projection following recent readings that have undershot expectations. Bloomberg Economics’ Abhishek Gupta expects the forecast to be lowered to an average 5.3%-5.5% for fiscal 2022 from 5.7% now.
But there are risks to the upside. Rising oil and commodity prices, together with a shortage of coal supplies, risk fanning inflation. That could complicate matters for the RBI, which has already been tolerating price-growth that is above its 4% medium-term target.
“We worry about high energy prices and cost push inflation,” said Pranjul Bhandari, chief India economist at HSBC Holdings Plc. in Mumbai. “We also worry about inequality-driven inflation as large companies gain pricing power.”
Pace of Growth
Latest factory and services purchasing managers’ surveys, consumption-tax data and import numbers suggest that the recovery from the pandemic-induced downturn has momentum. But not everything is hunky-dory, given considerable demand slack in the economy and a huge output gap in the manufacturing sector.
And while there is a potential that the RBI could upgrade its growth forecast from the 9.5% penciled in for the year that began April 1, it’s likely to be a touch-and-go decision with an energy problem looming large.
“Growth upgrade is not guaranteed but the RBI will likely signal greater confidence about the recovery,” said Rahul Bajoria, chief India economist at Barclays Bank Plc. “The Covid-19 wave remains under control and the vaccination drive has gained critical mass.”
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