Monetary Policy | RBI keeps repo rate unchanged — here’s the impact analysis by top economists
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
MPC has decided by a 5/6 majority to remain focused on withdrawal of accommodation to ensure inflation progressively aligns with target while supporting growth, RBI Governor announced.
After Reserve Bank of India’s two-day monetary policy committee (MPC) meeting, Governor Shaktikanta Das announced that the MPC has unanimously decided to keep the repo rate unchanged at 6.5 percent, as announced in the June policy, with the preparedness to act should the situation so warrant.
A CNBC-TV18 poll had expected the MPC to maintain status quo.
MPC has decided by a 5/6 majority to remain focused on withdrawal of accommodation to ensure inflation progressively aligns with target while supporting growth, RBI Governor announced.
The Governor noted that the headline inflation rose in June and is expected to surge in July as well as August due to vegetable prices. However, vegetable price shocks may reverse quickly, he said.
Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank, highlighted that the recent policy decisions have largely aligned with the predictions made by analysts.
“Broadly, if I look at the policy, decisions have been broadly in sync with what we have been anticipating. Our revised estimates for inflation after the vegetable led inflation has been 5.4 percent. So the headline number does look in-line but I think internally, if I was to look at the quarterly profiles, the 6.2 percent does have an upside risk. I think the near term risk to this quarter is much higher. While as per the last quarter estimates RBI has preferred to keep that unchanged, my sense is that it will be revised downwards eventually. So internally, I think there is much more upside to the near term,” she said.
CS Setty, MD of SBI, provided an in-depth analysis of the policy rates, noting that they fell within the anticipated range. However, Setty also pointed out an unexpected development in the form of incremental Cash Reserve Ratio (CRR). Despite this, he mentioned a positive aspect – the forthcoming review of the CRR on September 8. While Setty acknowledged this impending review, he expressed his belief that the overall impact on liquidity might not be significant.
“The policy rates are on expected lines. Of course, there are surprises on incremental CRR. The only positive point is that it is going to be reviewed soon on September 8. But I don’t think there’s going to be significant impact on the liquidity situation in the system, that is what my assessment is,” he said.
Rajiv Anand, Executive Director at Axis Bank, turned the spotlight on the broader economic scenario, emphasising the resilience of underlying growth and robust credit demand. He identified a key challenge for the banking sector —the ongoing competition for deposits.
“I think the underlying growth continues to be strong, credit demand continues to be strong. What we have to work through is the continued fight for deposits, and that really is going to be the theme for the rest of the year,” he mentioned.
Rajeev Radhakrishnan, CFA, Head of Fixed Income at SBI Mutual Fund, shared his insights on the RBI’s approach to liquidity management. He noted that among various potential measures, addressing liquidity appeared to be the path of least resistance. However, Radhakrishnan emphasised that this move was likely a one-off, incremental step.
“When you look at the overall set of measures that the RBI could have done, addressing liquidity, I think probably was a path of least resistance and even within that, it is largely a one off move on an incremental basis. So to that extent, I think from a bond market perspective, even that hawkish commentary and a potential upward revision in CPI estimates are broadly factored in. It is in line with the broader expectations that the market had getting into the policy,” he said.
Shifting the spotlight to inflation, Kaushik Das, Chief Economist at Deutsche Bank, discussed the central bank’s inflation forecast. Das expressed a contrasting perspective, suggesting that inflation might surprise on the lower side compared to the RBI’s projections. While the RBI forecasted a 6.2 percent inflation rate for July and September, Das put forth his forecast of around 5.8 percent. He anticipated a noteworthy disinflation trend, with a sharp decline in inflation by September, leading to a series of surprises to the downside.
“I think inflation now will surprise to the lower side compared to the forecast that they have given. So they have given 6.2 for July, September, as I said before, my forecast is about 5.8. So I think by September, you will see a very sharp disinflation, and then the numbers will keep on surprising to the downside,” he mentioned.
Dharmakirti Joshi, Chief Economist, CRISIL, said that Mint Road seems staunchly focused on keeping consumer inflation within the 4 percent target, while standing pat on rates and monetary policy stance.
“Additionally, the introduction of incremental cash reserve ratio could temporarily harden short-term rates. The Consumer Price Index (CPI)-based inflation was on a falling trajectory and appeared to have peaked during the June monetary policy review,” he stated.
“The spike in vegetable inflation is a recurrent, and often transient, phenomenon and the central bank can afford to look through it. But high food grain inflation, amid threat from weather and global developments, is difficult to ignore, given its higher weight in the CPI basket. Although repo rate hikes cannot directly impact supply-side driven food inflation, it becomes a concern if it sustains and spills over to other components, and steers headline inflation away from the goal. So fingers crossed on this,” said Joshi adding that a 25 bps rate cut in the January-March 2024 quarter is, therefore, a conditional possibility for now.
Analysing the impact of the latest monetary policy decision, Pranjul Bhandari, Chief India Economist at HSBC, said that this policy statement is far more hawkish, and it’s actually suitably hawkish that people are taking it to be and there are so many reasons for this hawkishness.
“One, I think the governor himself said that they had an option of not changing the inflation forecast, they may not have done it every time. But they still did it, they still increased it. I think there was a sense of urgency that came from there. The second was they spoke about looking through the vegetable price increase, but they also said that you can’t constantly look through all of these price increases, because at some point, they sort of play up and they ruin the inflation expectations trajectory for you,” he explained.
When the MPC increase the inflation forecast to 5.4 it also said that this is with the assumption of normal rains. So imagine if the rains are not normal, there’s some problem then actually inflation could turn out even higher if you think from that perspective, so I think from many perspectives, this remains a hawkish commentary pretty much like the last policy meeting, it’s not as dovish, as the markets are thinking it out to be, Bhandari commented.
While, Soumya Kanti Ghosh, Group CEA, SBI, reacted to the policy saying;
“Most of the statements make out the fact that well the increase is in transitory, they will look through it. But given the fact that they have now changed the forecast for next year first quarter also, I think that means that giving a communication to the market, that rate car is unlikely to start anytime soon in the near future.”
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